Entrepreneurs who rake most of their income as dividends could be hit hard by planned tax increases in this year’s Budget, an accountancy firm has warned.
PKF said that chancellor Gordon Brown was set to announce higher rate of tax out of dividend holders – a move which would cost many small firms a “significant percentage” of their income.
For example, an owner-manager whose company makes profits of £35,000 a year may take a salary of £5,000 and dividends of £25,000.
If the dividends are taxed as salary, the owner would see his or her income fall by £5,324 – over 15 per cent of the firm’s total profits.
PKF prediction of tax woes for dividend holders is based on paragraph 5.91 of Brown’s pre-Budget report, which stated that: “The government will bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner-managers of small incorporated businesses on the profits extracted from their company.”
‘Husband and wife’ businesses have already been warned they may face a tax crackdown in the Budget, with Brown widely predicted to stop the practice of tax being paid by the partner on the lowest band.
The fear of higher taxes for business is despite assurances in the pre-Budget report that a rise in borrowing would cover the deficit in the public purse, rather than increased tax requirements.
Peter Pennycard, national director of tax at PKF, said that Brown’s “weasel words” are likely to result in a much larger income tax and National Insurance bills for small businesses throughout the UK.
“Whilst there will be little that the business community can do to combat these changes, we have developed an easy-to-use tax calculator that owner-managers can use to be forewarned if not forearmed,” he said.
To use the calculator, click on www.pkf.co.uk/divtaxcalc
