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Summer Budget 2015 – Changes To Taxation Of Dividends

What does it actually mean?

Following the Budget announcements in July many Ltd Company Directors will be asking “ok, so how will that actually affect me?”

At this stage it is hard to say exactly as the information available is still very limited.

But making some fairly logical assumptions (possibly dangerous to apply logic to a government budget, but hey…) I will try to illustrate how the changes could affect a number of my clients.

 

The specific Budget items I am referring to and will be looking at are:

  1. Withdrawal of the Employment Allowance for one man (Director only) companies.
  2. The new Dividend Tax.
    1. £5,000 dividend tax free allowance (assuming the amount actually taken out of the company in cash, no silly grossing up stuff).
    2. Dividends in the basic rate tax zone taxed at 7.5%
    3. In the higher rate tax zone at taxed at 32.5%
    4. and in the additional rate zone taxed at 38.1%.

 

So what does this mean in terms of cold hard cash?

For simplicity I’m leaving out payment of a small amount of employee national insurance as it’s not relevant to the comparison.

 

Current Year Income and Tax

Mr A Smart is the Director and sole employee of his own Ltd company.

In the current tax year he is earning :

£10,600 salary

£31,785 gross dividends (actual cash dividends £28,606.50).

As the combination of his salary and dividends is just up to the higher rate tax there is £0 tax for Mr Smart to pay.

 

Total cash personal income             £39,206.50

Total personal tax                             £0

 

How will this change next year?

£10,800 salary (take advantage of the small rise in personal tax free allowance)

£31,900 cash dividends*

*Assuming here that the current ‘tax credit/gross up’ way of dealing with dividends is abolished under the new system, the cash you take out is the total dividend to report.

 

Total cash taken out                         £42,700 (the 2016-17 HRT threshold)

 

On the surface this looks better, great!

Until we look at the way the budget changes affect the tax side of things….

 

  1. The government will have withdrawn the employment allowance for one man band companies.

This means the Director’s salary will have cost his company Employer’s National insurance of around £414. Corporation tax bill will reduce by £122.80, but overall there will be a company taxes increase here of around £291.20.

 

  1. Then the changes to the taxation of dividends.

Of the £31,900 dividends, £5,000 are allowed tax free.

The remaining £26,900 will be subject to tax at 7.5% (tax £2,017.50).

 

Total cash personal income £40,682.50

Total personal tax                     £2,017.50

Total company tax extra            £291.20

So total extra tax               £2,308.70                  :’-(

 

Is there any good news?

Corporation tax is set to reduce from 2017 down to 18% by 2019. It won’t make up for the changes but it might help.

 

Is there anything I can do about this to limit the affect?

Multi-Director option (potentially….?)

Having a second Director might mean the Employment Allowance can be retained. It’s unclear from the Budget announcement if the withdrawal of this applies to one man companies, or Director(s) only companies…

 

Sharing the love with the shareholdings 

Gifting shares to spouses and adult children will mean the dividend income can be spread and more £5K allowances can be used before the tax bit hits. At least while this option is still available!

 

Make the most of the current rules!

In most cases it will be more beneficial to withdraw excess profits from the company in the current tax year before the new rules come in.

If you can increase the profits of a smaller business this year by delaying spend on big value items until the next tax year then do so! Yes, you’ll owe more corporation tax in that accounting year, but this will balance out the following year to what it would always have been. The bonus being that more profits will be available for withdrawal as dividends in this tax year.

 

Have a company pension scheme DEFINITELY!

Previously I’d have said overall it doesn’t make a lot of difference if you pay directly into your pension from the company, or withdraw dividends and pay those into a private scheme.

Now it will!

If you are paying into a pension now, look at swapping this to a ‘gross’ payment directly from the company. You may simply be able to switch over the type of payment you are making on your existing scheme. Or you may need to get a new pension set up.

 

Set up a childcare voucher scheme in the company for registered childcare.

You are still able to sign up to a childcare voucher scheme if you have young children in childcare.

The scheme allows you to pay into funds for childcare costs directly from the company without any personal tax or NI implications. Plus you save on corporation tax!

 

I will be keeping my eye on the detail, and my ear to the ground on this and the other relevant Budget changes, and will update as information becomes available…

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