From April 2016 Dividend Tax Allowance of £5,000 a year meaning that the first £5000 of dividends received will not be taxed. However the tax credit attaching to dividends is to be abolished and a new dividend tax rate 7.5% for basic rate taxpayers, 32.5% for higher rate and 38.1% for additional rate. We calculate that an owner manager of a company limited by shares will be worse off by £660 on profits of £30,000 (and worse off by £1,830 on profits of £50,000).

This will close the gap between salaries and dividends. It is still likely the low salary / dividend top up will suit many owner managers. Also it is likely to remain beneficial to operate as a limited company, compared to a sole trader, for profits above about £30,000 (but only just). If the dividend rates increase in future years, it may shift the balance towards sole traders being marginally better off at this profit point.

Taxation magazine editor-in-chief Andrew Hubbard said: “This dividend tax could be the next stealth tax –relatively easy to ratchet up each year now it is in place. Is the dividend tax a back door equivalent of introducing National Insurance on private company dividends?”

These new measures reduces the difference in the tax burden on commercial enterprises paying dividends and social enterprises who cannot pay dividends (e.g. companies limited by guarantee). Unfortunately a company limited by guarantee (or any other non-dividend company) still remains much worse off compared to their dividend paying or sole trader cousins.