Tag Archives: Dividends

Dividend Allowance Changes

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The new dividend tax regime was introduced by former Chancellor of the Exchequer George Osborne. This has only been in place since April 2016, but it is already to be amended in April 2018, following announcements in the Spring 2017 Budget.

Before April 2016, a basic rate taxpayer paid no tax on their dividend income. Only higher rate or additional rate taxpayers paid tax on their dividend income at an effective rate of 25% or 30.6% respectively.

Since April 2016 the first £5,000 of dividends has not attracted any tax liability and dividend income above £5,00 has been taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

In the recent Budget the new Chancellor announced that the tax-free dividend allowance of £5,000 will be reduced by £3,000  to just £2,000 for dividends paid on or after April 2018

So what will this mean to you?

Since April 2016, if you have no other income, you can earn up to £16,000 in dividends (£5,000 dividend allowance + £11,000 personal allowance) and pay no tax. Above this you have to pay divided tax.

But from April 2018, you will only be able to earn up to £13.500 in dividends (£2,000 dividend allowance + £11,500 personal allowance) and pay no tax, subject to the Autumn Budget.

This will mean shareholders will be worse off by £225 a year if they are basic rate taxpayers, £975 a year if they pay higher rate tax or £1,143 a year if they are liable at the additional rate. FOr a couple who share the running of their company, this is doubled to £450, £1,950 or £2,286 depending on the tax rate.

What should you be planning?

Provided your company has sufficient distributable profits, directors should consider accelerating dividend payments before 6 April 2018 to benefit from the current dividend tax-free allowance of £5,000 before it reduces.

If you would like more information on this subject, please get in touch on 01872 271655 or email neil.brittain@kelsallsteele.co.uk

Dividends and Tax

Dividends – All change

We are fast approaching the end of the tax year and from 6 April 2016 it’s all change as far as the taxing of dividends are concerned.

The legislation

Under current legislation, your dividends are deemed to be received net of 10% tax. For example, a dividend of £10,800 is actually treated for tax purposes as being a dividend of £12,000. Providing total income (including the £12,000) remains within the basic rate band, this £12,000 is taxed at 10%, so the tax due is £1,200. As the dividend received was only £10,800 the recipient has effectively already paid the £1,200 and no further tax is due. If the basic rate band is used up, the dividend income is then taxed at the higher rate of 32.5%. A £12,000 dividend in the higher rate band would result in tax due of £3,900 of which the recipient is deemed to have already paid £1,200, so the amount due to be paid is £2,700.

Under the new rules, the tax calculation is quite different. The dividend amounts received are not adjusted upwards so if you receive £10,800 you are taxed on £10,800. The first £5,000 will be tax-free and from then on, the rates vary, depending on your level of other income. For dividend income falling within the basic rate band, the tax will be 7.5%, for dividend income falling within the higher rate band, the tax will be 32.5% and for dividend income falling within the additional rate band, the tax will be 38.1%.

This year

It is particularly important this year to ensure that you are able to take advantage of the current legislation by ensuring you receive the maximum amount of dividends within your basic rate band, so that no additional tax will be payable. Remember, any dividends voted do not have to be taken as physical cash now (although they can be), but could be added to your Directors Loan Accounts and drawn down tax-free at a later date when cash flow allows.

However you can only vote dividends if the Company has sufficient reserves to do so. Your Accounts will show the ‘Reserves’ of the Company which is normally retained profits from previous years less any previous distributions e.g. dividends.

It is also important to consider your other personal income for the year and for future years to plan ahead and ensure that dividends are voted in the most tax-efficient manner. A few things to consider would be the claw back of child benefit for couples where one partner’s income exceeds £50,000. Also your tax-free personal allowance is reduced where your income exceeds £100,000. Remember also that contributions to pension schemes increase your basic rate band so that more of your income is taxed at the basic rate rather than the higher rate. Other deductions to your income may be available also e.g. interest on qualifying loans.

An example

The following example is based on a scenario of an £8,000 salary and net dividends of £45,000 with no other personal income. You will see that by keeping the dividend level the same next year, the tax will increase by £1,762. To keep the take-home amount the same, the dividends need to rise to £47,610.

  2015/16   2016/17 2016/17
  £   £ £
Salary 8,000 8,000 8,000
Dividend received 45,000 45,000 47,610
Income tax liability (3,513) (5,275) (6,123)
Take home amount 49,487   47,725 49,487

There are always many things to take into consideration when proposing and voting dividends and if you would like assistance on any specific examples please don’t hesitate to contact us on 01872 271655.

Budget Highlights

Further to the Chancellor’s recent Summer Budget, some of the key headlines for our small and medium businesses are as follows:

Corporation tax

  • The Annual Investment Allowance has been set at £200k from 1 January 2016 for an indefinite period, giving businesses a chance to plan their capital expenditure.
  • The rate of corporation tax will be reduced to 19% from April 2017 and to 18% from April 2020;
  • Corporation tax relief will be removed from companies who write off the cost of goodwill purchased on or after 8 July 2015.
  • Dividends paid out of company profits will see a change in the way they are taxed in the recipient’s hands; from April 2016 the dividend tax credit will be abolished and a new dividend tax allowance of £5,000 a year will be introduced. Dividend income above this allowance will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Payroll and National Insurance

  • The annual Employment Allowance for National Insurance Contributions will be increased from £2,000 to £3,000 from April 2016.  However, companies where the director is the sole employee will no longer be able to claim this allowance.
  • The National Minimum Wage (NMW) for employees over 21 will increase from 1 October 2015 to £6.70 per hour; from April 2016 a new National Living Wage (in the form of a premium on top of the NMW) will be introduced for workers aged 25 and above, initially set at £7.20 per hour, it is expected to rise to over £9 by 2020.
  • The personal allowance is set to rise from £10,600 in 2015-16 to £11,000 in 2016-17 and to £11,200 in 2017-18.

Other key proposals

  • Farmers will be allowed to average their incomes for tax purposes over five years rather than two from April 2016.
  • From 6 April 2017, landlords will no longer be able to deduct all of their finance costs from their residential property income, they will instead receive a basic rate deduction from their income tax liability for their finance costs.
  • Rent-a-room relief will be increased from April 2016 from £4,250 to £7,500.
  • Inheritance tax nil-rate band (NRB) will remain frozen at £325,000 until April 2021; with an additional NRB for the main residence if passed to a direct descendant of maximum value £100,000 in 2017/18, rising £25,000 per year until it is £175,000 in 2020/21. This NRB cannot exceed the value of the property, and is tapered away to £nil for estates exceeding £2m in value.  Any unused residence NRB can be transferred to the surviving spouse
  • From April 2017, IHT will be payable on all UK residential property owned by non-domiciles including property held indirectly through an offshore structure.
  • From April 2016, the Government will introduce a taper to the Annual Allowance (the limit of tax relieved pension saving that can be made by an individual or their employer each year) for those with adjusted annual incomes (including their own and employer’s pension contributions) of over £150k;
  • From April 2017, anyone who has been resident in the UK for more than 15 of the past 20 tax years will be deemed UK-domiciled for VAT tax purposes and be liable to UK tax on their worldwide income and assets;
  • Government to consult on improving the effectiveness of IR35 legislation to counter disguised employment.