When I became self-employed in 1989, I was advised by my accountant to operate as a sole trader and I was taxed under the personal tax rules.
My wife, who also worked in the business, was an employee and had her pay set at a level to use her personal tax allowance. In 1999, having grown our net profit to a level where remaining as a sole trader would have required me to pay a higher rate of income tax, my wife and I became partners in the business, with both of us paying basic rate tax.
This changed after then-Chancellor Gordon Brown reduced the Corporation Tax rate for Companies with a declared profit of below £300,000 to 19% in 2002. Taking our accountants advice we changed our business status to a Limited Company for our trading year 2003/4 and started to draw the majority of our income by dividend.
Since 2002 many independent retailers have registered to become a Limited Company. We paid corporation tax on our business’s net profit and declared a dividend at the appropriate level to withdraw an income. This proved to be an efficient way of minimising our tax bill.
As part of his 2015 budget Chancellor George Osborne announced that people who receive dividend income will be charged an income tax on dividends from 6 April 2016. There will be a Dividend Allowance that applies to the first £5,000 of an individual’s taxable dividend income.
If you receive a dividend income of more than £5,000, effective from 6 April 2016 you will pay dividend tax at these rates:
- 5% for dividend income within the basic rate band
- 5% for dividend income within the higher rate band
- 1% for dividend income within the additional rate band
If you have not already spoken to your accountant about this change it is advised that you do so before the start of the new tax year. As with all tax matters, getting professional advice is essential.