New Dividend Tax benefits Higher Rate Tax payers with part time business

The new dividend tax comes into force in April 2016. We've been crunching numbers and looking at scenarios - the whole thing is complicated and ....

Would you believe that the new tax benefits those who have a job and pay tax at the higher rate under PAYE as their main income but who have a business on the side.

Maybe someone who earns an income and is a higher rate tax payer but does some consultancy on the side ... not too dissimilar to maybe a Member of Parliament #justsaying.


Let's take some examples.

For the purposes of the illustration we've assumed that tax at the higher rate would be paid on all income from the business, as it is a secondary income stream and the recipient is already earning over the higher rate threshold elsewhere.

Our number crunching is based on the rules for 2016 / 2017

Profit of £7,500 from a part time business


Sole Trader Taxation would be .....

£7,500 x 40% = £3,000

There would be no class 4 National Insurance as the profits do not exceed the threshold.

So the remaining income would be £4,500

Limited Company Taxation would be ....

Corporation tax at 20% = £1,500

This would leave £7,500 - 1,500 = £6,000 to take as dividend

The first £5,000 of this would be tax free under the new rules leaving £1,000 to incur dividend tax at 32.5% = £325.

So remaining income would be £7,500 - 1,500 - 325 = £5,675

Meaning that the recipient would be better off as a limited company by £1,175

Profit of £20,000 from a part time business


Sole Trader Taxation would be .....

£20,000 x 40% = £8,000

Class 4 National Insurance would be 9% on profits over £8,060 = £1,074.60

So total sole trader tax would be £9,074.60

The remaining income would be £10,925.40

Limited Company Taxation would be ....

Corporation tax at 20% = £4,000

This would leave £20,000 - 4,000 = £16,000 to take as dividend

The first £5,000 of this would be tax free under the new rules leaving £11,000 to incur dividend tax at 32.5% = £3,575.

So remaining income would be £20,000 - 4,000 - 3,575 = £12,425

Meaning that the recipient would be better off as a limited company by £1,499.60


Isn't that amazing ... who knew a tax change that is hitting the hard working business owner in their pocket could actually benefit the wealthier salary receiver with a second income.

The cynic in me would love to know how much MPs operating a limited company for consultancy, public speaking and so on will be better off by thanks to George Osborne.