It is relatively commonplace for shareholders of owner managed businesses to extract their income from the business by taking a low salary (in order to benefit from the corporation tax deduction available on employment income, plus avoid national insurance by keeping the salary below the threshold for NIC) and then extract profit via dividends, which are taxed at a lower rate than employment income.

However, in July it was announced that the way and rate in which dividends are currently taxed will change, therefore making this current extraction policy obsolete and potentially tax-ineffective. This will come into effect from April 2016.

Dividend tax credits are being abolished. This is where dividends have previously been grossed up by 100/90 when included in the tax computation, but then a 10% deduction has been given.

In addition to this, a dividend allowance of £5,000 will be introduced.

Dividends will then be liable to tax at 7.5% in the basic rate bank, 32.5% in the higher rate bank and 38.1% in the additional rate band. This is compared to 0%, 25% and 30.56% in 2015/16.

As such, tax efficient profit extraction will need to be considered, potentially alongside planning on the overall structure of the business. Certainly, tax benefits of setting up a business as a company are now more questionable.  On the other hand, with corporation tax rates set to fall over the next few years (from 20% to 18% by 2020), this will be another factor to take into consideration.