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An image of Rutton ViccajeeThe fifth and final part of our series in which Rutton Viccajee guides you through the changes to the taxation of dividends.

 

Given all of the previous advice (see parts 1-4 of this series), you should also factor in the risk that Class 4 NIC will rise when Class 2 contributions are abolished in April 2016.

 

There is a real risk that Class 4 NIC could rise to 12% in the future – note that the triple tax lock specifically applies ONLY to Class 1 primary and secondary rates and not to Class 4.

 

As an illustration, increasing Class 4 to 12% in 2017 would show the following (using the NEW rules for dividend taxation):

 

Profit Sole trader Company Tax % in co. Saving
£20,000 £3,233 £2,520 12.6% £713
£30,000 £6,433 £5,120 17.1% £1,313
£40,000 £9,633 £7,720 19.3% £1,913
£50,000 £13,180 £10,320 20.6% £2,860
£75,000 £23,680 £20,220 27.0% £3,460
£100,000 £34,180 £31,720 31.7% £2,460

 

Rutton’s comment:

 

In other words, we are nearly back to the ‘answer we first thought of’! This table is very similar to the first, at least for the first few lines. The higher earners save less tax it is true – but everyone is still saving.

 

Rutton’s overall conclusion

 

Don’t assume or make quick judgements. The Chancellor’s ambition of the death of the ‘minimum salary, take the rest as dividends’ strategy is somewhat premature! Simply because his own rules, and other changes, still make incorporation a very attractive option for the small business manager. Indeed, the changes may turn out to be largely neutral in effect – see above tables.

 

Hit your target

 

There is never a substitute for receiving targeted tax advice, tailored to your situation. The above tables rely on many assumptions, some of which may not apply to you.