Small business owners and investors have been hit by a £6.8bn tax raid under changes to the dividend taxation system. Tax experts say it may lead many to consider selling up before the rules are implemented.

Small business owners who are top rate tax payers currently have the option of growing their business and paying themselves dividend income at a 30.6pc tax rate, or selling the company and paying capital gains tax at a rate of 28pc.

From next year the top rate of tax on dividend income will rise to 38pc, while capital gains tax is set to remain at 28pc.

20pc taxpayers 40pc taxpayers 45pc taxpayers
Effective dividend tax rate now 0pc 25pc 30.56pc
Rate after April 2016 (after £5,000 allowance) 7.5pc 32.5pc 38.1pc

Source: KPMG, HM Treasury

Dermot Callinan of the accountancy firm KPMG said: “This reform has the potential to incentivise private company owners to put themselves up for sale.

“We were not expecting this and the new rates has our clients thinking: ‘Is it better to now sell the business ahead of the changes’.”

Some investors will also share the pain. Under the new rules only the first £5,000 a year of dividend income will be exempt from tax.

For dividend income above this allowance, basic-rate taxpayers will pay 7.5pc, while higher-rate taxpayers will pay 32.5pc tax and those who pay the additional rate of 45pc will face 38.1pc tax.

Budget 2015 winners and losers
Buy-to-let: How landlords have been affected
Budget 2015 summary – all the key points

The Treasury said the changes “will ensure that ordinary investors with smaller portfolios and modest dividend income will see no change in their tax liability – and some will pay less tax”.

It added: “Combined with the increases the Government has made to the personal allowance and the introduction of the personal savings allowance [which allows interest on savings accounts to be paid tax-free], from April 2016 individuals will be able to receive up to £17,000 of income per annum tax-free.

Mr Callinan, added: “While a million people who receive dividends will see an effective £5,000 tax-free allowance, the changes will increase top-rate taxpayers’ contributions by at least 25pc. For all that the Chancellor wants to encourage saving, the new tax structure could discourage many high-income investors from doing so.”

Read more