Contractors' Questions: Did Osborne tinker with dividend tax?

Contractor’s Question: I’m unsure if George Osborne adjusted it in his Autumn Statement, but what is the current rate of tax on dividends, and what will be the dividend tax rate next year? For my purposes as the owner of a limited company, of which I’m the sole director, I’d also like to know if the Treasury announced any change to the rate of Capital Gains Tax.

Expert’s Answer:  The basic rate of tax is currently 20%. For 2013-14, the band of income taxable at this rate is being reduced from £34,370 to £32,101, so that the threshold at which the 40% band applies will fall from £42,475 to £41,450.

Meanwhile the 50% band currently applies where taxable income exceeds £150,000 but the rate will fall to 45% next year (2013).

Dividend income is taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. Where income exceeds £150,000, dividends are taxed at 42.5% this year and 37.5% next year.

We recommend to contractors that planning should be considered before April 6^th 2013 where income is expected to exceed £150,000. Deferring income until next year or reducing by specific reliefs, such as gift aid donations and pension contributions, should be considered.

In terms of capital gains tax, the current rates of CGT are 18% to the extent that any income tax basic rate band is available and 28% thereafter. The rate for disposals qualifying for Entrepreneur’s Relief (ER) is 10% with a lifetime limit of £10m for each individual.

No specific announcement was made in the Autumn Statement about the CGT rates for next year.

The ER limit is very generous and owners of businesses should ensure that they meet all the conditions necessary to secure the relief throughout the 12 months up to the date of a disposal.

The expert was Martin McKechnie, a director of contractor accountancy firm the Low Tax Group.