SMALL BUSINESS owners who pay themselves in dividends will see income taxes hiked under proposals to abolish the dividend tax credits system.
The system, first established more than 40 years ago to combat high rates of corporation tax, will be swept away and replaced by an annual allowance making the first £5,000 paid in dividends tax free.
The Treasury said the change will generate an additional £2bn a year in revenues. But entrepreneurs who take cash out of their companies via dividends will be hardest hit by the change when it is introduced in April 2016.
Higher rate taxpayers normally pay 25 per cent on dividends but this will increase to 32.5 per cent under the plan – an effective 7.5 per cent increase in income tax.
Basic rate taxpayers will pay 7.5 per cent on dividends over £5,000.