Dividend payout advantages drain away for small-business owners

Life is getting harder for self-employed people and small business owners paying themselves through dividends rather than a salary”

Rishi Sunak
Chancellor Rishi Sunak’s attitude is becoming clear
(Image credit: © Peter Nicholls - WPA Pool/Getty Images)

The government’s announcement of new tax charges to pay for the cost of social care could be another nail in the coffin for the practice of self-employed people and small-business owners paying themselves through dividends rather than a salary. While the dividend option has long been the preferred route for many self-employed workers, its advantages have been steadily eroded in recent years.

At first sight, dividend tax rates still look advantageous. From next year, basic-, higher- and additional-rate taxpayers will pay 8.75%, 33.75% and 39.35% respectively on dividends they pay themselves from their businesses, a 1.25% increase compared with today. This simply matches the 1.25% increase in national-insurance contributions for taxpayers who receive a salary.

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David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.