Have you planned ahead for the new dividend tax changes?

Changes to the way dividends are taxed, which come into force next spring, will hit the incomes of many small business owners and savers.

From 6th April 2016 the first £5,000 of dividend income in any tax year will be tax free. Dividends received in excess of this amount will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.

H M Revenue and Customs have begun to release details of how the changes will work in practice and it looks like many basic rate taxpayers will be worse off from April.

But there are steps that business owners and savers can take now to avoid being caught out.

If you have portfolio shareholdings you should consider transferring some of your shareholdings into ISAs. Of course this should be considered in tandem with the effects of capital gains tax on transfers.

Business owners should also actively review the cost benefit of withdrawing or postponing dividends between now and next April. Owner managers who regularly receive large dividends taxed at higher rate may in fact find themselves better off from next April.

If you withdraw before April you may be able to reduce your overall tax bill over the two years ending 5th April 2017. But the saving may be small and you would have to find more cash to pay a large one-off tax bill a year earlier than would have otherwise been the case in January 2017. Remember also that withdrawing larger dividends will significantly deplete your company’s reserves and in any case, may be legally restricted if you have insufficient reserves available by April 2016.

As well as reviewing your current management accounts now for availability of reserves next April, you should consider your own marginal rate of tax in the 2015/16 and 2016/17 tax years. You should think about making personal pension payments or charitable donations during these periods as well.

Companies should also review balances on directors’ loan accounts and cash flow as this may affect your decision whether or not to draw the dividend later when cash flow allows, or to pay it all immediately.

You should consider passing some shares to your partner as well, although you need to be careful to avoid other potential tax traps.

The new rules on dividends are complex so it’s crucial that you crunch the numbers and seek professional advice before deciding how best to proceed in advance of these tax rate changes.