So what exactly is this tax on dividends?

Simon Sweetman, Vice Chairman of the FSB's taxation unit, said: "We now have some ideas about how the tax on dividends, announced at the budget, will work. It is of course not a tax on dividends - it is a tax on profits which is triggered by a dividend being paid."

"The new rules mean that from 1st April 2004, all distributed profits will be liable for a minimum rate of corporation tax of 19%. It uses a slightly complicated mechanism, best illustrated by an example."

"On profits of £40,000 – the first £10,000 is taxed at 0% and £30,000 at 23.75%, giving a corporation tax bill of £7,125 (an effective rate of 17.81%.) If £20,000 is distributed, £20,000 is taxed at 19% and the balance of £20,000 at 17.81%. The final tax bill is £3,562.50 + £3,800 – a total of £7,362.50 or an increase of £237.50."

"The Inland Revenue has confirmed that payment of dividends to directors out of past profits will not be exempt."

"The 19% Distributive Tax is a less draconian measure than removing the zero rate of corporation tax altogether or imposing National Insurance Contributions on dividends. The maximum extra tax bill is £1,900 and companies making a profit of more than £50,000 a year will not be affected at all."

"But the hardest hit will be very small businesses – those with profits of £10,000 to 15,000 a year which they cannot afford to leave in the company. For these businesses, there may still be an advantage in incorporation, but it will be less than it was and may not offset the extra administrative costs faced by companies of around £750 a year."

"Businesses this small were enticed into incorporation in the first place because of the tax advantages on offer. Somebody living on this level of profit could not afford to pass up a saving of over £3,000, but now sees that possibility recede into the distance. They may now have the added trouble and expense of dis-incorporation. The Chancellor has done them no favours."

"Because this is a targeted measure it does not affect the operation of IR35 or the settlements legislation. But the Chancellor also announced a wider review of 'the interaction of the tax system of definitions of income of self-employment, and the remuneration paid to owner-managers.' The FSB welcomes this review provided it is to be a real debate that addresses the underlying problems, rather than another knee-jerk reaction from the Treasury."



29th March 2004

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