Whilst most eyes are on the deep tax credits cuts that amount to an average of £2k for 4 million households from April 2016 onwards. The Chancellor also announced changes to the taxation of dividends which will impact on small company owners who through limited companies currently are able to vastly reduced their tax bills through by a minimal salary so as to soak up the annual £10k tax free allowance and then pay the reminder of upto an additional £30k in dividends without paying any extra tax, due to the 10% dividend tax credit rule i.e. that for basic rate tax payers no additional tax is due on dividend income.

The Chancellor effectively announced his intention to start closing this tax loophole by initially announcing a 7.5% tax on all dividends earned over a new £5k allowance. Therefore company owners and in fact all investors / share holders who are currently in receipt of more than £5k in dividend income will in future be taxed at 7.5% on all dividends over £5k and upto the base rate allowance limit above which the tax rate jumps to 32.5% and then again to 38.1%.

i.e. currently a basic rate tax payer on a salary of £10k and in receipt of £30k in dividends pays no additional tax. From April 2016 onwards the same dividend income will now be only tax free for the first £5k and so the remaining £25k will be taxed at 7.5% i.e. a new tax bill of £1,875! And as mentioned earlier this will likely be the first step in a phased increase of taxes all the way towards a 20% tax rate so as to virtually negate all of the advantage of receiving income in dividends rather than through PAYE.

So the effective rate of tax for small business owners will jump from 20% (corporation tax) to 27.5% from April 2016 with further tax hikes expected in future years which could now encourage many small business owners to sell ahead of the tax hikes.

Clearly, owners of limited companies have the current tax year to as much as possible front load payment of dividends ahead of April 2016, so as to help alleviate the large dividend tax bill that will become due. Whilst investors have the option of transferring their stocks portfolios into ISA's.

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By Nadeem Walayat

http://www.marketoracle.co.uk

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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