In light of the new dividend rules?
The taxation of dividends is changing and many doctors and dentists are questioning their tax position. Should they remain trading as a limited company, or, are other options now worth considering? Whilst the new rules are beneficial to tax-payers who receive dividends of under £5k per year, a limited company business owner taking dividends as the main source of income, will likely feel the pinch.
The changes to dividend tax
The government’s aim was to “simplify” the system of how dividends are taxed, which was a fair intention. However, small business owners are finding this decision anything but “fair” and, it seems they are now paying the price for the lower cost of corporation tax.
The changes to dividend tax come in from 6 April 2016. The “tax credit” issued now, for dividends up to the top of the basic rate tax band, will be abolished. Instead, there will be a £5,000 tax-free band, after which tax will be applied at the following rates:
- Basic rate – 7.5%
- Higher rate – 32.5%
- Top rate – 38.1%
Read more – How the new dividend rules affect you
How much extra tax in £££’s
Very broadly speaking, for a director who takes a basic salary of around £11,000 per year and then maximises dividends to the top of the basic-rate tax band, tax is likely to be around £2,000 extra per year.
NOTE – This depends on other income though so it is essential to get a formal review from your accountant or financial adviser.
For directors who draw over the basic rate tax band already, their overall tax will rise by 7.5%, taking into account tax at both basic, and, higher and top rate.
Is a limited company still most tax effective?
Drawing dividends has always been the best method to receive income, from a tax perspective, as there is no National Insurance as there is with a salary, and the tax rate on dividends has historically been lower than that of self-assessment income tax.
The management of a limited company continues to be more costly though, in terms of things like accountancy fees, which is why some small businesses with lower profits still benefit from trading as a sole trader, especially in the early years.
The graph below demonstrates that there is still a benefit to trading as a limited company compared to a sole trader, until, profits reach around £140,000, when the rate of tax will be broadly equal.
Compared to taking a salary, the new dividend set-up still comes out more beneficial, financially.
Are your profits around £140,000?
Call us to discuss your options
Graph by: Accounting Web
So, all in all, for most doctors and dentists it will still be the best route to trade as a limited company. In addition, a limited company provides the same “limited liability” arrangement as before, which offers some protection to your business, and, can make some aspects of trading easier.
Setting up a business?
If you are setting up a new dental or medial business, then it is wise to speak with an an accountant who can run a calculation to provide advice on the best route for you – limited company versus sole trader.
Dental & Medical Financial Services have over 25 years experience working with dental and medical professionals. We can ensure the best tax position for you and your business.
Tel: 01403 780 770