Unpleasant effect of new dividend rules

Q: I have my own building business, About 10 years ago I incorporated on the advice of my accountant. Each year I draw a small salary and then I take out the profits of the business by drawing dividends.
I know that dividend taxes are going up so I want to know if this is still the best strategy for me. Last year the profits of my business were £70,000, my salary was about £8,000, and my dividends were £50,000.
 
A: The only winners under the new dividend tax rules are high earners, with proportionally small amounts of dividends. Anyone like you who was relying on their basic rate band to take ‘tax free’ dividends will lose out.
In your case, I estimate that your annual total tax bill including corporation tax, will increase from about £16,600, to about £19,400, an increase of £2,800 or almost 17%. 
 
Q: Would I be better off just taking a much larger salary from the company, or by going back to being a sole trader?
 
A: At this level of profits you are still better of continuing to trade as a limited company, and using the small salary/large dividend model, but most of the tax advantages (particularly when compared to being a sole trader) have been swept away. Depending on other factors, it might make sense for you to go back to the old sole-trader model. Some of the factors which will need consideration are:
 
• Trading as a limited company protects you personally should the company run into problems.
• Sole traders have more scope for offsetting business expenses – particularly on items with mixed private and business use.
• Professional fees are higher for a limited company.
• If your income is subject to CIS deductions, then the sole trader reclaim mechanism is much more straight forward.

I would recommend you take specific advice before you decidewhat is best for you.