Protection Covered: What impact will the April dividend tax change have on protection?

Q: "What impact will the April dividend tax change have on businesses from a financial protection consideration?" (Tim Boddy, Moneysworth IFA)

A: Johnny Timpson, financial protection technical & industry affairs manager at Scottish Widows said:

"Good question, following last year's ‘Summer budget', from April 6th 2016, there is no more grossing up of dividends and offsetting a notional credit.

"Instead, taxpayers get the first £5,000 tax-free, then pay tax at increased rates on the balance.

"In practice, even after the £5,000 tax-free allowance, the loss of the tax credit means more tax will be paid overall, with directors paying 7.5% more tax on any dividend payments.

"The changes have moved the 'break-even point for tax' to nearer £70,000 of profit. Beyond this the combined potential impact of corporation tax changes and the new higher dividend rate actually see the tax benefits of incorporation starting to fall again.

"Here it might be more tax-efficient to operate as a sole trader, having said this, the cut in corporation tax to 19% in 2017, with a further cut to 18% by 2020 is positive news for those operating a limited company.

"Many clients operate as a single person business and these can be established on a sole trader, limited company or even a partnership basis (both traditional and limited liability) with/without employees.

"A single person business structure can have implications for the shape of their business protection advice and cover needs.

"It's possible for a single owner business using any of these structures to have employees who are not the business owner, but the following tips look at purely single person businesses.

"The main protection types are likely to be:

• Business loan protection.
• Family protection, where it might be possible to use relevant life cover, depending on the business structure.