Dividend tax changes become law: How are you affected?

Today see the introduction of new dividend tax reforms which are likely to affect thousands of business owners.

Under the changes introduced in George Osborne's Summer 2015 Budget, the old tax credit and special dividend tax rates, which meant basic rate tax payers didn't pay tax on dividend income, have been removed.

Individuals are now entitled to an annual £5,000 tax-free limit for dividend income, but for anything over £5,000 and after using up any remaining personal allowance, a 7.5% rate applies for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for those on a high income and subject to additional rate income tax.

Many small business owners pay themselves through dividends and ahead of the changes a petition protesting against the regulations was signed by more than 54,000 small companies.

Petition organiser Serena Humphrey said: "A 7.5% extra tax on your dividends is going to hurt. It's going to stop you doing things like marketing, like pension contributions for yourself (we don't have an employer to make them for us) and like buying new equipment or taking on staff to expand."

In addition, during a meeting with a government adviser at 10 Downing Street organised by Enterprise Nation accountant Jessica May suggested a potential change to payment on account to minimise impact.

The government didn't back down though saying the measures are aimed at making the tax system fairer.

In response to the petition, a statement said: "These reforms will significantly reduce the incentives for people to set up a company and pay themselves through dividends rather than wages simply to reduce their tax bill. Taxpayers and the Exchequer will now be £500m better off as result of reduced incentives for tax motivated incorporation.

"Those who choose to work through a company continue to pay lower rates of tax than the employed or self-employed. But the reforms move the overall tax rates for the self-employed and those incorporated closer together, making the system fairer overall."

Ministers say 95% of all taxpayers will either gain or be unaffected by these changes, but Clive Lewis from the Institute of Chartered Accountants in England and Wales told The Times that people will now need to be making at least £30,000 a year to make company formation tax efficient.

Emma Jones, founder of Enterprise Nation, said: "While we understand that the dividend tax move may be in some way mitigated by the promised drop in corporation tax to 17% by 2020, it still comes at a time when founders are being asked to do more and more to run a business.

"The people we see are not swaggering millionaires, arrogantly avoiding paying a fair amount of tax into the system. They are people running businesses who take a modest amount of money via dividends, often reinvesting year-on-year to keep innovating and improving their offer.

"They are now having to work harder and harder for every penny to keep up with proposed quarterly tax returns, auto enrolment and the living wage. It's a shame that nothing could have been done to minimise the impact."