Changes To The Rules On Dividends For Small Companies

Following the recent Budget 2004 the Government has announced a change on the taxation of Director’s / Shareholder’s extraction of profits by means of a dividend payment from a company with effect from 1st April 2004.

Prior to the 1st April 2004 a company could distribute profits to its directors/shareholders and take advantage of nil corporation tax due on profits up to £10000. If profits above £10000 were distributed then the corporation tax charge of 19% received marginal relief up to £50000 of profits.

The Government u-turn on the taxation of dividends from 1st April 2004 is now subject to 19% on all distributions to director’s/ shareholders. If a company’s profit were £50000 prior to the 1st April 2004 then there will be no change to the corporation tax liability as 19% tax is applicable on profits.

The main effect to companies is where profits were £10000 and less. A company will now pay £1900 corporation tax on the distribution of a £10000 dividend. However if the company retains the profit and makes no distribution to its shareholders then the company can still claim 0% tax. Also a company with profits over £10000 will receive marginal relief on the 19% tax due on profits retained in the company.

Please see further examples:

If, bearing in mind these changes, you decide that incorporation is not for you, it is not simply a case of deciding to revert back to being a sole trader or partnership. There are complex legal, commercial and tax issues to consider, it is important that you get the right advice before going down this path.

Changes in Corporation Tax

This spreadsheet gives examples of how this relates for a Company’s taxation, the subsequent 2 pages highlight the effects on a personal taxation basis.