As you are no doubt aware changes to the way dividends are taxed come into force from April 2016...
The most notable changes for business owners are as follows:
- From April 2016, notional 10% tax credit on dividends will be abolished
- A £5,000 tax free dividend allowance will be introduced
- Dividends above this level will be taxed at 7.5% (20% basic rate taxpayers), 32.5% (40% higher rate taxpayers), and 38.1% (45% additional rate taxpayers)
Without doubt 2 key questions arise:
- Is low salary / higher dividend still the most efficient route for me?
- Is there anything I can do to reduce my additional tax liability as a result of these rule changes?
Taking the first question the answer is simply yes. What the change in dividend rules has achieved is a reduction in the tax advantage available to a business owner. There isn’t therefore anything to be gained by increasing salary from the company, higher dividend is still the most efficient route.
The answer to question 2 is twofold. In the long term the answer is no as unfortunately new rules will continue to tax any dividend distribution in excess of £5,000 per annum.
However, in the short term it is possible to accelerate dividends declared (above and beyond normal levels, for example to cover next year’s distributions too), thus avoiding the increased tax rates for 12 months. As long as reserves in the company allow, a dividend can be declared and credited to a director's / shareholder's loan account to be drawn at a later date when cash allows. A common misconception is that a dividend must be taken once declared but this isn’t true.
Accelerated dividends will be taxed at the existing dividend tax rates as long as they are declared before 31st March 2016. It is, however, important to understand that tax on any accelerated additional dividends will be due 12 months earlier as they will be declared within income to 5th April 2016 rather than to 5th April 2017.
But beware, this acceleration will only be beneficial in 2 scenarios:
- If you are currently a higher rate or additional rate taxpayer so are already paying tax on your dividends or
- If you are a basic rate taxpayer who still has scope within their basic rate tax band to take additional dividend to utilise any remaining basic rate allowance
As with any tax planning there is never a “one size fits all” solution so it is important you contact us in the near future to discuss the potential impact of these changes and how we can best structure a solution for you. Please call us on 01527 836 836 or email firstname.lastname@example.org if you have any questions.