Dividends – Budget changes impact all SME business owners

posted on July 28, 2015in the Blog Category

Dividends – Budget changes impact all SME business owners

Recent budget changes impact on all SME business owners that extract income from their limited companies using the fairly standard low salary, high dividend model. The outcome is that we are all going to be worse off!  However, we do have some ideas to help limit the damage! Feel free to contact us to discuss.   The impact depends on the amount of available profits to distribute but the following examples give a flavour for the impact (note: various assumptions used in the modelling as we don’t know all the final rules just yet):-  

Net Disposable Income
Current Rules New Rules from 2016/17 Reduction
£35,000 profit, £10,000 salary balance as dividend £29,767 £28,687 £1,080
£40,000 profit, £10,000 salary balance as dividend £33,767 £32,387 £1,380
£50,000 profit, £10,000 salary balance as dividend £41,053 £39,787 £1,266
£60,000 profit, £10,000 salary balance as dividend £47,053 £46,533 £520
£75,000 profit, £10,000 salary balance as dividend £56,053 £54,633 £1,420
£85,000 profit, £10,000 salary balance as dividend £62,053 £60,033 £2,020
£100,000 profit, £10,000 salary balance as dividend £71,053 £68,133 £2,920
£111,250 profit, £10,000 salary balance as dividend £77,803 £74,208 £3,595
£122,500 profit, £10,000 salary balance as dividend £82,548 £80,283 £2,175
£150,000 profit, £10,000 salary balance as dividend £96,668 £90,438 £6,230
£167,500 profit, £10,000 salary balance as dividend £107,168 £99,888 £7,280
£200,000 profit, £10,000 salary balance as dividend £125,224 £117,046 £8,178
  Notes:-
  1. Profit figures used are those available before payment of salary and are pre-tax.
  2. It is assumed that a salary of £10,000 is taken, corporation tax deducted from the residual profits and the remainder paid out as a dividend.
  3. The net disposable income figures for 2016/17 are based on the new rules but using 2015/16 tax rates for direct comparison.
  4. The tax increase rises in absolute terms until it reaches £1,720 at profits of £46,690. The increase then starts to reduce, due to the effect of the higher rate liability on the grossed up dividends in 2015. It turns once again, having reached a low point of £137 increase at profits of £58,000. It is at that point the higher rate in 2016 comes in and produces a rising tax increase. The following graph illustrates the change.
  5. Many other factors may have an impact in due course such as changes to NI.
  6. Dividend still remains beneficial as a means of extraction compared to salary when factoring in employers NIC as a deduction from the profits available to distribute.
  7. It will no longer be financially beneficial to incorporate a business where profits are less than £35-40,000 pa.
Tony Collier, Managing Director

Written By: MBL

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