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Dividend Tax from April 2016

Dividend Tax from April 2016

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What are peoples views on the new 7.5% dividend tax ?

Sounds like really bad news for most of the companies who I act for, as well as holders of quoted companies.

For clients who do not mind self employment, almost means that they maybe better looking at self employed again.

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Locutus of Borg
By Locutus
08th Jul 2015 14:59

Bad news for many of my clients ... and me!

I have a director of a company who pays herself a small salary and high-ish dividends, who a few years back was furious when I told her that her personal tax liability was going to be £250.  That's going to be a difficult conversation.

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By youngloch
08th Jul 2015 15:01

We need to crunch numbers
For some then self employment may indeed prove better but I think in reality that's going to be higher rate earners when you consider NI on basic band

My instant thought is to declare very large dividends pre 5 April and take it to the loan account to lock in the current tax rules and then feed off over a following period eg no higher rate exposure for a few years (where reserves permit) and avoid new rule higher rate exposure

Mental arithmetic suggests though that previously to get 7500 a higher rate shareholders company had to make profit of 12500 but that now rises to circa 14k ish

And that's based on 18% CT

Painful indeed and the more you move beyond the NI zone the more self employed appeals

Less so I expect for basic rate

It sounds though like there's more cash dividend to take en route to the higher rate threshold as I assume there's no grossing up to do

Oh well let's hope they fix the roof quickly!

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By tommaher
09th Sep 2015 12:51

Dividend tax

I liked your idea to move dividends to the loan account.  If for example a company had 2 shareholders and £500k in shareholders funds then how would they move it and how would they repay it to avoid this additional 7.5%?

 

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By 3569787
03rd May 2016 16:12

7.5% 32.5% and 38.1%

?

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RedFive
By RedFive
08th Jul 2015 15:18

lots of changes

bobbuilder wrote:

It's on page 44 here:

Thanks for the link, that's my bedtime reading sorted.

Loads in the Budget today to digest that will effect my clients.........Employment allowance up to £3k, but not for single Director companies....Corp Tax rate reduction.....new minimum/living wage.......threshold increases.......dividend reform.........

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By Chris Jarratt
08th Jul 2015 15:47

Disincorporation

Dividend tax changes definitely not good news for small OMB. Factor in other matters such as motor car costs, I see a raft of disincorporations on the horizon.

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By Red Leader
08th Jul 2015 15:18

neutralises most tax-based incorporations

7.5% of the basic rate band equates to about the NI saving obtained by incorporation.

I suspect the 7.5% rate was set deliberately to do exactly that.

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RedFive
By RedFive
08th Jul 2015 15:31

tax motivated incorporation
1"These changes will also start to reduce the incentive to incorporate and remuneratethrough dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500 million a year from 2019"  Taken from the document linked to above.

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By andy_furniss
08th Jul 2015 15:32

What am I missing?

With the tax credit gone we no longer have to gross up a dividend, meaning in 2016/17 you'd have an £11k salary and a £32k dividend, if you were to take it to the top of the BRB. The first £5k of the divi would be tax free, leaving £27k to be taxed at 7.5%. The tax charge here of £2,025 outweighs the 10% credit of old. Yes there'll be a personal liability, but you're able to declare higher dividends? What am I missing?

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By rfandaltd
08th Jul 2015 15:35

More personal tax on extracted profit that's already been subject to CT. Changing EA criteria. More resources for HMRC.

Sounds like a multiple taxation attack on micros and SMEs, looks like an attack on micros and SMEs - is an attack on micros and SMEs. I bet HMRC will be concentrating on tackling avoidance on easy to intimidate micros and SMEs, not big business. 

Even without proper detail to calculate outcomes it is obvious there will be significant numbers of very unhappy small business people paying a lot more tax on their extracted profit in future. Once they realise what the implications are they are not going to be happy with this so called business friendly Government. Friendly to big business, not to small. Massive shot in the foot. Basic rate business owners - ie most of them won't easily forget if annual tax bills suddenly jump by £1500-2000 

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By newmoon
08th Jul 2015 15:39

Dividends v self employed

Is the comparison, as far as basic rate goes, that self employed will pay an extra £1,000 on the first £5,000, and £2,700 Class 4 NIC at 9%, total £3,700. Whereas dividends will be 7.5% on £25,000, so £1,875. If that's correct, the dividend route is just over half the tax of the self employed route.

Presumably there's also the bonus that the dividend won't be grossed up by 10/9 so less gross income anyway.

BUT the dividend is resulting in £1,875 more tax than it did previously, but you can take maybe £3,500 more dividend before you hit higher rates (because of no grossing up)?

Or have I misunderstood this?

 

 

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By youngloch
08th Jul 2015 15:51

That seems about right but....
Once you get into higher rates then ouch! I think we are going to queue up for the cpd....

I personally think there's a strong argument for an asset rich company to award the big dividend now take the personal tax hit in January 17 and then put it all to the loan account. Unless retirement or sale is on the horizon for Entrepreneurs Relief

I am shocked though that the Conservatives are doing this to small business - and not even a gradual intro, no it hits like a hammer

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By andy_furniss
08th Jul 2015 15:54

Excellent

newmoon wrote:

Is the comparison, as far as basic rate goes, that self employed will pay an extra £1,000 on the first £5,000, and £2,700 Class 4 NIC at 9%, total £3,700. Whereas dividends will be 7.5% on £25,000, so £1,875. If that's correct, the dividend route is just over half the tax of the self employed route.

Presumably there's also the bonus that the dividend won't be grossed up by 10/9 so less gross income anyway.

BUT the dividend is resulting in £1,875 more tax than it did previously, but you can take maybe £3,500 more dividend before you hit higher rates (because of no grossing up)?

Or have I misunderstood this?

 

I'm glad I'm not the only one...

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By Gem7321
08th Jul 2015 16:52

I'm with you

andy_furniss wrote:

I'm glad I'm not the only one...

 

I'm with you

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By cparker87
08th Jul 2015 16:04

Pissed[***] on my chips

Well I thought life was going to settle down but changes at the core of my business are set to change that. 

Great news on the additional IHT allowance. I'm just doing STEP exams to try to assist people in reducing that burden. Frayed the new string to my bow somewhat. 

Thanks for the link; I shall have a read. 

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By Briar
08th Jul 2015 16:06

And worse cash flow ..

Payments on Account are likely (which many SME shareholders having income up to the HRB don't generally pay now)

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By SteLacca
08th Jul 2015 16:11

Provided the company has the money

For incorporated companies that can't afford to pay the maximum to the basic rate threshold, and so the available dividend distribution is the same regardless of tax credit or tax charge, post budget is definitely making them worse off.

My own view is that comparisons have to be done with parity on the starting figures (i.e. same salary, same dividend withdrawn), since that is the only method that will work for all companies.

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By Briar
08th Jul 2015 16:41

26% Tax Rate!

Ignoring allowances etc, a marginal £10,000 profit will attract CT of £2,000; then the dividend of £8,000 will be taxed at 7.5% (£600). So an effective tax rate of 26%.

Using the £10,000 for a higher rate band taxpayer, CT £2,000, Dividend Tax £2,600 - that's 46%!

Additional Rate taxpayers will pay CT £2,000, DT £3,048 - so 50.48%!

So much for reducing taxes on companies!!

Chancellors should go back and read the discussion papers on imputation tax published in the early 70's.

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By memyself-eye
08th Jul 2015 16:28

£600 not £6,000?

to get 26%

but what about the £5k 'allowance'?

then = 7.5% on £3k? (£8k - £5k) = £225.

 

Confused......

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By Briar
08th Jul 2015 16:43

£600 edited

Thanks memyself-eye for pointing out my typo

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By Marion Hayes
08th Jul 2015 16:35

Life interest trusts and beneficiary

How will this impact on my clients who rely on dividend income from investments and/or trusts which were set up to look after them in their old age?

Dividend income from quoted securities is higher than £5,000 net at the moment, they are nowhere near higher rates once state pension received, but will now have a tax bill? 

 

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By michael7
08th Jul 2015 17:22

Life interest trusts and beneficiary

Marion Hayes wrote:

How will this impact on my clients who rely on dividend income from investments and/or trusts which were set up to look after them in their old age?

Dividend income from quoted securities is higher than £5,000 net at the moment, they are nowhere near higher rates once state pension received, but will now have a tax bill? 

 

Was thinking the same. We have a number of IIP trusts which just receive dividends which are paid to the life tenant. Suppose the trustees will now have to pay 7.5% in tax (similar to say how tax is paid on gross interest now) and then the life tenant can claim that on their tax return.
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By Charlie Carne
08th Jul 2015 16:40

Possible first step to alignment of tax/NI treatment?

The effective tax rates are higher than marginal IT rates alone (20/40/45%), so perhaps this is the Chancellor's first step towards alignment of combined tax and NI treatment of dividends vs rates on salaries and self-employed.

PS @memyselfeye - you are correct that Briar had a typo and it should have been £600, not £6,000, but Briar said "Ignoring allowances etc", so as to look at marginal rates, hence ignore the £5k.

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By Briar
08th Jul 2015 16:45

"Ignoring allowances"

You beat me to it Charliecarne. I was watching Murray win!

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By memyself-eye
08th Jul 2015 16:54

Ahh.... all is now clear

Not that I like it any better!

Is this the IR35 solution everyone is looking for I wonder?

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By Ian McTernan CTA
08th Jul 2015 17:02

Couldn't Fix IR35

Looks like instead of trying to fix IR35 they decided to say they will consult on it, and in the meantime impose another tax on small business owners.

Let's just ignore the fact they paid 20% on the profit already, or that they took a lot of risks and worked long hours- let;s ensure they are taxed the same as a salaried employee who works 35 hours a week, demands overtime, holiday pay, etc etc..

This change is just dragging company owners who take all the risks down to the same rates imposed on employees.  I'm tempted to go be an employee and not bother trying to run my own business any more....(ok, not really..).

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By liladevi2015
10th Jul 2015 18:08

Exactly, seems the Govmt don't understand the freelance/contracting market and just cowtail to big business who see us as competition - can't have that now can we! IR35 is an ill conceived legislation that should be scrapped, yet they will be 'consulting' on it and also relying on 'whistleblower' clients, making it even harder. This will hit big business who rely on contracting staff! But the short sighted Tax generating view of the Govmt & HMRC can't see the long term implications to the economy or workforce.

They're also using old language 'controlled' who is controlled in a professional/SME job?

 

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By Adrian T
08th Jul 2015 17:28

The New Rates...

The new rates of tax on dividends are the old effective rates, once the 10% tax credit was taken into account, plus 7.5%. So 0%, 25% and 30.5555% have become 7.5%, 32.5% and 38.1%.

I had predicted Class 4 NICs on close company dividends.... so near 

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By memyself-eye
08th Jul 2015 17:58

Come back Gordon Brown

All is forgiven!

No, not really. :)

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By Briar
08th Jul 2015 18:18

Yes, come back Gordon!

You made us accountants load of money - higher fees from incorporating most of our clients, the PAYE online incentive (half shared with clients), causing the salary/dividend arrangement, allowing goodwill amortisation for tax, and lots of other non-joined up thinking.

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By ireallyshouldknowthisbut
08th Jul 2015 18:02

Do we assume the first £5,000

Do we assume the first £5,000 of dividends count towards total income for tax purposes?

Or is it like CGT when the allowance is effectively ignored? 

I think the answer is "we dont know yet" given the lack of a detailed document. 

 

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By scottyelland
08th Jul 2015 18:16

In addition

ireallyshouldknowthisbut wrote:

Do we assume the first £5,000 of dividends count towards total income for tax purposes?

Or is it like CGT when the allowance is effectively ignored? 

I think the answer is "we dont know yet" given the lack of a detailed document. 

 

Its in addition to income tax PA as Osborne said you can now earn £17,000 odd tax free next year.

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By chewmac
08th Jul 2015 18:05

On the bright side

A small husband & wife company can pay:

H salary £10,000

W salary £10,000

H&W dividends £10,000

all for £2,195 corp tax bill (£12,195 profit before tax), no personal income tax.

Effective tax rate 6.8% (£2,195 / £32,195).

vs Current equivalent of £2,500 tax bill (£10,000 divis / 0.8 = £12,500 pre-tax profit).

Effective tax rate 7.7% (£2,500 / £32,500).

A small bonus to lots of my middle-income (or are these low income) clients.

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By Briar
08th Jul 2015 18:41

Are you sure?

Chewmac, Are you sure? You are not comparing the same amount of profit before salaries and tax. Thus,  

After : Profit before salary and tax £32,195, Salaries £20,000, CorpnTax £2,195, No Dividend Tax (2*£5,000).

Before : Profit before salary and tax £32,195, Salaries £20,000, CorpnTax £2,195, No Income Tax (2*£5,000 grossed up to 2*£5,556).

As soon as Dividend Allowance has been used up:

After : Profit before salary and tax £35,000, Salaries £20,000, CorpnTax £3,000, Dividend Tax (2*(£6,000-£5,000)*7.5%) £150 - Total Tax £3,150

Before : Profit before salary and tax £35,000, Salaries £20,000, CorpnTax £3,000, No Income Tax (2*£6,000 grossed up to 2*£6,667) - Total Tax £3,000

There will also be NICee to pay, though no NICer as there is more than one director and the EA can be used.

 

 

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By Howard Marks
08th Jul 2015 20:17

PI

chewmac wrote:

A small husband & wife company can pay:

H salary £10,000

W salary £10,000

H&W dividends £10,000

all for £2,19
5 corp tax bill (£12,195 profit before tax), no personal income tax.

Effective tax rate 6.8% (£2,195 / £32,195).

vs Current equivalent of £2,500 tax bill (£10,000 divis / 0.8 = £12,500 pre-tax profit).

Effective tax rate 7.7% (£2,500 / £32,500).

A small bonus to lots of my middle-income (or are these low income) clients.

I hope to god you've got some!

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By Old Greying Accountant
09th Jul 2015 10:25

Yes ....

chewmac wrote:

A small husband & wife company can pay:

H salary £10,000

W salary £10,000

H&W dividends £10,000

all for £2,195 corp tax bill (£12,195 profit before tax), no personal income tax.

Effective tax rate 6.8% (£2,195 / £32,195).

vs Current equivalent of £2,500 tax bill (£10,000 divis / 0.8 = £12,500 pre-tax profit).

Effective tax rate 7.7% (£2,500 / £32,500).

A small bonus to lots of my middle-income (or are these low income) clients.

... these are low income earners, I think the received assumption would be that you need to be a 40% tax payer to be referred to as middle income. Basic rate tax payers would be low income and any where the PA is reduced or paying 45% would be the high earners. It is these middle income earners that drive the economy, put their homes and health at risk to make their businesses work and get continually shafted by governments of any colour by being expected to pick up the lions share of the national tax bill.

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RLI
By lionofludesch
09th Jul 2015 10:32

Free free

Old Greying Accountant wrote:

......... by being expected to pick up the lions share of the national tax bill.

Feel free to pick up my share of the national tax bill.

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By ireallyshouldknowthisbut
08th Jul 2015 18:25

.

@chewmac, There would be ee's NI in the above example of £10k salary, and is no different from the current situation in terms of tax on dividends. 

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By ireallyshouldknowthisbut
08th Jul 2015 18:44

@scotty, what the chancellor said does not answer that question. That statement would be true in either scenario. Actually saying that it is still not really true, the company from which the dividend has been paid would have suffered CT. 

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By Marion Hayes
08th Jul 2015 18:31

@michael7

At the moment all income mandated so no Trust return - if Trust pays tax they will have compliance fees too and all will reduce distributable income

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
08th Jul 2015 21:29

Well, sh!t[***]
Something like this had to happen sooner or later, I guess.

As if I didn't need something else big to take up my time.

I'm going to worry about this in a month when people have done analyses etc, no point getting my knickers ina twist just yet. Time to make a cup of tea.

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By mikeyban
08th Jul 2015 21:39

One add on
The one thing I have over emphasised to my clients is tax should never have been the single motivation to incorporate.

Watch the television... Protection against personal claims should be the real choice....

Removes some IR35 issues and levels the playing field... I think he's been quite clever ....

Shame but was always coming.

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By sarah douglas
08th Jul 2015 21:56

Budget 2015: Buy-to-let tax break to be cut

 

I am pleased with this and I think it is fair.  

 

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By youngloch
08th Jul 2015 21:56

Yes it's a tax hit but......

Well firstly I never recommend a client to incorporate JUST for tax reasons, often there are other factors e.g.:

1. They want to be a limited company for the limited liability

2. Ownership may be, or could be, easily shared between individuals (family or not) giving protection which a partnership (excluding LLP) cannot

3. They want to trade through a company for the better corporate impression it gives

4. That there are, and continue to be, tax planning reasons.

5. That they are "told" by their client that they need to trade through a limited company (these personal service companies are likely to become increasingly shaky but we shall see)

Today is a kick in the side of option 4 which is stinging right now but then remember:

A. It would seem that the removal of the dividend tax credit allows more cash to be drawn up to the higher rate threshold

B. This has an advantage for those fearing the child benefit threshold of £50k

C. Genuine businesses can save up to £3000 employers allowance

D. Corporation tax will be coming down (combined with employers allowance this goes quite a way to paying the dividend tax)

E. There is nothing worse than a client incurring a higher rate personal tax bill on a self employed business, not because of what he personally earned in cash, but because of high levels of debtors or bank balances in the business. Always a hard one to explain and will still be a reason to discuss incorporation as that alone can be an excellent reason to incorporate - particularly with rates heading towards 18%.

F. No payments on account of Corporation Tax so better cash flow and opportunity to then grow and develop the business.

 

Once all this settles I am sure we will all adjust to a new "threshold" or "type of business" whereby a limited company structure is the preferred option. I personally don't think this is enough to tell clients to disincorporate right now as the tax saving is still there, just reduced, and it's a case of remembering all the other positives and to let our clients know that whilst we are NOT over the moon about this that we will continue to help them make the best of what we are up against.

I think we need to take this opportunity to remind our clients we are there with them and looking out for their best interest. Not communicating with those clients would be a big mistake!

I think as long as clients know what is coming they can prepare and budget accordingly and most importantly we need to remind them of the value for money that our fees represent!!! (and whilst we are at it seek a 7.5% fee increase!!!)

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By Matrix
08th Jul 2015 22:35

Thanks for sensible comments

My clients are businesses who always will need tax advice and planning and, while these are costly changes for us and them, tax advice will still be required.

How can taxpayers take risks and make commercial decisions in an uncertain tax environment such as the UK with tax rates constantly changing?

 

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By Glenn Martin
08th Jul 2015 22:17

What a disappointment
It is the small business people (many whom have been forced into self employment) that were driving the small recovery in the country.

Oh yes then let Google etc pay bugger[***] all, but we will screw another £2000 out every plumber, sparky and tradesman with a one man company.

The promised "Northern Powerhouse" seems to be disappearing down the track at a fair rate of knots.
If it happens I will eat my hat.

Bunch of Arse[***].

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By kenny achampong
08th Jul 2015 22:50

tax breaks

Obviously this is the biggest thing in the budget for most of us and is not only a substantial tax hike, and an unbelievable amount of work in letting our SMEs know what is going on and probably closing a lot of them down to go back to sole traders and all the stress and work that entails, but to quote the BBC news in it's in depth analysis tonight, apparently this is all it is:-

Under the banner...."Dividend tax changes" as he read out...

"there will be new tax breaks on income from shares for smaller...er... investors" (and that is verbatim, I had to rewind it)

How do politicians always manage to do this ? It was all this smokes and mirrors and secrets and lies that got us in this IR35/NI mess in the first place. 

I shall look forward to my very own minus £2K 'tax break' next year.

Time for a glass of wine.

 

 

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By Briar
08th Jul 2015 23:48

Glass of wine at 22.50?

I've had a bottle by then!

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By whiteways
09th Jul 2015 00:04

Cheap solution?

Did a quick "back of a envelope" calculation. Due to divorce I am a sole director company (not my fault and not happy I'm being penalised by the removal of my EA as a result, but whoever said tax law was fair?).

So in rough figures, I reduce my 2016 salary from 11K to 8K (below Class 1 NIC limit) and pay myself 5K dividend. Result - no personal tax or NIC liability and no Employers NIC. I save Employees NIC I would otherwise have paid of 300ish.

I pay extra CT on 11K minus 8K, i.e. 600. Total extra cost, 600 minus 300 equals 300.

I have over 30K languishing in my DLA, so I can top up with that over the next several years, or pay myself an extra 5K dividend and incur personal tax of 375 if needs be.

I'm still paying about 800 less overall than I would if I were self employed even after the changes. So not ideal and not something I'm happy about, but neither is the sky falling in.          

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