In the summer budget the government announced new rules to come into effect from 6 April 2016.
These rules included a tax on dividends at a rate of 7.5% however they also include a Dividend tax allowance of £5000 per year.
This will likely mean a increase in tax for and small business paying dividends including contractors.
This is an example (it assume personal allowances have been used by salary/other income)
A director/shareholder of a company taking a dividend of £20K
There would be no income tax as the owner is a basic rate tax payer.
Dividends £20K Dividend allowance: £5K Taxable dividends £15K
@ 7/5% = £1,125 tax to pay.
It should also be noted that the 7.5% increase is across all levels of tax payer:
Dividend tax rates 2015/16
Basic rate taxpayer 0%
Higher rate taxpayers 25%
Additional rate taxpayers 30.6%
Dividend tax rates 2016/17
Basic rate taxpayer 7.5%
Higher rate taxpayers 32.5%
Additional rate taxpayer 38.1%
(These rates are based on the actual dividend amount received.)