Constantly evolving tax rules leaving business owners paying costly tax penalties

by | Nov 8, 2023

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Complicated UK tax rules are seeing business owners finding themselves liable for costly tax penalties due to not keeping up with the latest rules, according to national financial advice firm Continuum.

As the Chancellor prepares for his latest Budget later this month, tax changes are once again on the agenda.

National IFA Continuum has called on the Chancellor not to add more complexity to the existing tax system, with many businesses owners already being caught out by costly tax penalties due to the latest changes to the rules.

 
 

Richard Watkins, Chartered Financial Planner at Continuum, said recent changes to tax have already added complexity for business owners, many of whom have had to make changes to the way they pay themselves.

He said: “In previous years, paying yourself with dividends from your business, rather than a salary used to be the simple way to reduce your personal tax.

“The government has made some changes to the rules. Dividends can still reduce or eliminate your income tax liability but they are not tax free. You can only pay dividends on profits generated, after corporation tax charge, which for companies with profits under £50,000 is 19%, while those with profits over £250,000 is 25%, with a sliding marginal relief for those in between.

 
 

“The amount of tax you pay on dividends then depends on your total income and tax band. You can earn some dividend income each year without paying tax, and for the tax year 2023-2024, the dividend allowance is £1,000. The rate of dividend tax you pay depends on your tax band 2. For the 2023-2024 tax year, dividend tax rates can range from 0% up to 39.35%, depending on your marginal rate of dividend tax, which in turn is linked to your income tax band.

“Dividends still have a role to play in reducing your tax liability, but they are much less effective than they used to be.”

These changes to the rules have caught out many business owners, according to Continuum. 

 
 

The national advice firm has been educating business owner clients about the changes and helping them make the necessary changes to their profit extraction strategies.

One area where the IFA firm has seen business owners caught out is failing to take into account other areas where the dividend tax allowance may already be being used.

Mr Watkins added: “Your dividend tax allowance could already be used up by other payments you have received. If you have investments that pay dividends, your allowance could be eaten up.”

He encouraged business owners to make sure they are paying themselves in the most tax efficient way, reminding them that reducing their tax liability is legitimate.

He said: “Some of the techniques that helped reduce tax in the past will not work now – you need to know what the changes are to avoid costly surprises.

“But there is still no rule that says you must take profits out in a way that gives the most tax to the government. You are perfectly entitled to organise your affairs to pay the minimum amount of tax – as long as it’s within the rules – and at Continuum we know the ways to help.”

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