Welcome to a simpler dividend tax regime (but be prepared to pay more tax)

In the Summer 2015 Budget, George Osborne announced fundamental changes to the way in which dividends are taxed. The changes take place for dividends received from 6 April 2016. Some individuals who extract profits from their company as dividends may need to consider whether to increase dividend payments before this date.

When a dividend is paid to an individual, it is subject to different tax rates compared to other income due to a 10% notional tax credit being added to the dividend. So for an individual who has dividend income which falls into the basic rate band the effective tax rate is nil as the 10% tax credit covers the 10% tax liability. For a higher rate (40%) taxpayer, the effective tax rate on a dividend receipt is 25%.

From 6 April 2016:

• The 10% dividend tax credit is abolished with the result that the cash dividend received will be the gross amount potentially subject to tax.
• New rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
• A new Dividend Tax Allowance will remove the first £5,000 of dividends received in a tax year from taxation.

Many owner-managers running their business through a limited company will pay more tax next year if most of the profits are paid out as dividends rather than as a salary. This prospect raises a number of questions which we answer below.

Will trading as a limited company still be the best option?

There is still a benefit in tax terms for most individuals to continue to trade as a limited company. The tax saved by incorporation compared to being unincorporated will be reduced next year but there is still an annual tax saving.

Will it be better to take a dividend rather than an increase in salary?

There is still a benefit for a director-shareholder to take a dividend rather than a salary. The amount of the tax saved will be less than under the current regime.

Should dividends be paid before 6 April 2016?

If you do not currently extract all the company profits as a dividend you may wish to consider increasing dividends before 6 April 2016. However, other tax issues may come into play, for example the loss of the personal tax allowance if your total ‘adjusted net income’ exceeds £100,000. There will also be non-tax issues such as the availability of funds or profits in the company to pay the dividend.

Please contact us before you make any decisions about changing the amount of dividends taken. Please note our answers above are based on only limited information that has been supplied by the government on the new regime. We expect draft legislation for the regime to be published by the end of the year.

We can also provide you with expert inheritance tax and VAT tax advice.

Real Time Information submissions – no more automatic penalties

In June, HMRC issued the first in-year notices to employers with fewer than 50 employees who missed the deadline for sending PAYE information to HMRC.

Previously, PAYE late filing penalties only applied if the end of year return was late. However, under Real Time Information PAYE returns are now required ‘in year’ (generally at least monthly) and as a result tax law has changed to allow HMRC to charge automatic penalties for the late filing of these in year PAYE returns.

The new regime started on 6 October 2014 for employers with 50 or more employees with smaller employers being liable for the penalty from 6 March 2015. An employer who, during a tax month, fails to make a return on or before the filing date is liable to a penalty as follows:

  • 1-9 employees – £100
  • 10-49 employees – £200
  • 50-249 employees – £300
  • 250 or more employees – £400

However, the automatic nature of the penalties is not in line with the likely direction of HMRC’s general approach to many of its penalties, as outlined in a discussion document which it issued earlier this year. Rather than issue late filing penalties automatically when a deadline is missed, HMRC will take a more proportionate approach and concentrate on the more serious defaults. A more targeted approach means HMRC can focus ‘on those determined to bend or break the rules’.

This new approach will apply to all employers but HMRC will review the new approach by April 2016.

Please note, the deadlines for sending PAYE information stay the same, including the requirement to send PAYE information on or before the time that employees are actually paid or due to be paid. So it is important to ensure that PAYE matters are completed on a timely basis and we are happy to assist in this area.

Our payroll team can also assist you with setting-up your company’s auto-enrolment scheme. Contact us today for more information.

Tax planning still available for two homes through Principal Private Residence relief

The UK tax regime provides an important relief from the capital gains tax charge (CGT) on the gains made by an owner-occupiers on the sale of their private homes. This is known as Principal Private Residence relief (PPR).

The general principle is that only one home can count as  PPR at any one time. However, prior to 6 April 2014, where a private home qualified for PPR at any stage during the period of ownership, the last three years of ownership qualified for PPR, even if the property was not lived in during that three year period. That period was reduced for most individuals to 18 months for disposals made on or after 6 April 2014.

Although the period has been reduced there is still useful tax planning that can be achieved for someone who has recently acquired an additional property which will also be a home, for example a property ‘in the country’ which will be lived in at various periods in the year. The example shows the potential advantages of making a ‘PPR election’.


Mr and Mrs White have lived in a property in Leeds for a number of years . They are now semi-retured and acquire a second property in Wales in which they intend to also reside. They start to occupy the Welsh property on 1 June 2015.

As the Leeds propery already qualifies for PPR up to 1 June 2015 the gains accruing on a time apportioned basis to the last 18 months of ownership will be relieved even if they nominate the other property to be their PPR.

They therefore elect for the Welsh property to be their PPR on 1 December 2016. This means this property will also benefit from PPR for the last 18 months of ownership.

They may vary that nomination back to the Leeds property at any time. If the variation is made within a short period of time then any resulting gain on the Leeds property will likely be covered by their annual exemptions.

If they want to change their minds again about the nomination, they can do so. However none of this flexibility is available if the first election has not been made to HMRC within two years of the time when the second property became available to live in.

Last year the government issued proposals to remove the ability for everyone to make an election but it has changed its mind. Instead the government has implemented changes which affect non-resident individuals with property in the UK and UK residents with property abroad.

Prior to 6 April 2014, an indivdual who was not resident in the UK was not subject to UK CGT on residential property so could sell property free from UK CGT for non-UK resident persons.

Further changes restrict the availability of nominating a property for PPR. Examples of the individuals affected by these changes are:
• UK residents who go to work abroad and acquire an overseas second home in the country in which they work
• individuals who retire overseas but keep their homes in the UK.

They may be entitled to PPR for the period prior to 6 April 2015 but will have difficulty in getting the PPR to apply to the UK property after that date. However the last 18 months of ownership may continue to qualify for PPR.

Our tax experts are always on hand to assist you with your personal tax planning and accounting services, so please feel free to contact us if you consider these changes affect you or you wish to consider making an election for PPR where you have two homes in the UK.


The government announces its new flat-rate State Pension scheme

To ask any question about the new flat-rate State Pension scheme seems to suggest a straightforward answer. Everyone will get the same amount won’t they?

The answer to the latter question is no. The amount you will get will depend upon a number of factors including:

  • how many qualifying years you have on your National Insurance (NI) record
  • how many years you have built up an entitlement to the additional State Pension under the current system
  • how many years you may have been paying lower NI contributions because you have been in a salary-related workplace pension scheme or you received NI rebates which went into a personal pension plan. Either of these scenarios had the effect of ‘contracting out’ a person from full entitlements under the State Pension scheme.

The new State Pension scheme applies to everyone who reaches State Pension age on or after 6 April 2016. The full State Pension will be at least £151.25 but the actual amount will be set this autumn. People who have no contribution record under the current system will have to obtain 35 qualifying years of NI credits on their record to give them the flat-rate amount.

However, for individuals who have already built up a NI record (which is nearly everyone reading this article) there are transitional provisions which take into account the NI record accrued up to 5 April 2016. This is a very reasonable complication to have in moving to the= new system. Otherwise, people who have accrued a substantial entitlement under the current system of basic and additional State Pension would be treated very differently depending on whether they reach State Pension Age on the 5 April 2016 (and thus receive a pension under the current system) or on the 6 April 2016 (and therefore receive a pension under the new system).

Under the transitional provisions, your NI record before 6 April 2016 is used to calculate your ‘starting amount’ for the new system at 6 April 2016.

Your starting amount will be the higher of either:

  • the amount you would get under the current State Pension rules (which includes basic State Pension and additional State Pension)
  • the amount you would get if the new State Pension had been in place at the start of your working life.

For many of those reaching State Pension age in the near future, the transitional provisions offer the best of the current and new systems. Employees who have built up a significant entitlement to the additional State Pension will retain their entitlement. People who have been self-employed for most of their working lives may have little or no entitlement to the additional State Pension and thus will benefit from the new State Pension rules.

Example – self-employed

Joe will reach his State Pension age in October 2020 (the State Pension will have risen from 65 to 66 by then). He has been selfemployed except for the early part of his working life and he has no entitlement to additional State Pension. He has 32 qualifying years on his NI record.

His starting amount on 6 April 2016 (based on current figures) will be:

  • under the existing rules – 30 years NI record would give a full entitlement to the basic State Pension of £115.95 a week
  • using the new rules – Joe would get £138.29 a week (£151.25 x 32/35).

Therefore his starting amount is £138.29. As his starting amount is less than the full rate of the State Pension, if he continues working for three years after 6 April 2016 he will accrue sufficient additional pension rights under the new system to bring him up to the full rate of £151.25.

Example – employed

Maureen will reach her State Pension age in October 2020. On 6 April 2016, Maureen has 35 qualifying years on her NI contribution record. During her working life, Maureen has had short periods when she was contracted out of the additional State Pension.

Her starting amount on 6 April 2016 will be:

  • under the existing rules – her 35 years NI record would give her a basic State Pension of £115.95 a week plus £86 additional State Pension but a deduction for her contracted out period of £32. (This will be computed by the Department of Work and Pensions.) This totals £169.95.
  • using the new rules Maureen would get £151.25 less a deduction of £32. This totals £119.25.

Maureen’s starting amount will be the higher of these two amounts, which is £169.95 a week. As her starting amount is more than the full rate of the State Pension, she cannot accrue additional pension rights under the new system.

How do you get a state pension forecast?

You can get a forecast in some cases online via the Government State Pension website – in other cases you need to ask for a forecast by post. For more information and confidential advice, contact us.


Wellden Turnbull Summer Newsletter

Wellden Turnbull are pleased to release the summer edition of our quarterly Newsletter, which we’ve filled with topical information to help you and your business.

Here’s a summary of what we’ve included:

  • For those of you who are company car drivers we advise on why you may have seen a large increase in the estimated car benefit in your notice of coding. We also consider the further changes which are planned and what this will mean in terms of future car benefits.
  • If you are self-employed you need to be aware that the system for determining the liability and ways of collecting Class 2 national insurance contributions, generally by direct debit, is about to change. Also there are plans to abolish this class of national insurance contribution altogether.
  • We also consider the tax reliefs available for those businesses planning for capital expenditure on plant and machinery in the next few months. With the amount of the available Annual Investment Allowance (AIA) uncertain we consider whether it may be beneficial to bring forward capital expenditure.
  • Changes to charity audit exemption thresholds mean that some charities may now be audit exempt and will instead fall under the independent examination regime. We consider the scope of the changes to the rules and the options available.
  •  With significant changes to the rules which apply where an individual has not bought an annuity with their pensions savings we look at what happens if their pension fund remains available to pass on to beneficiaries on their death. We summarise the changes and consider the implications of this change on inheritance tax planning.
  • The issue of determining if someone is employed or self-employed is not a new one and the risks to any business paying for the freelance services of an individual are significant. Those who are found to be paying a person as if they are self-employed in error can result in large arrears of PAYE and NIC being payable by the employer. The Office of Tax Simplification (OTS) has some suggestions on this issue.
  • If you offer customers prompt payment discounts or you take up the prompt payment discount offered by your suppliers you should read our article which considers changes to the VAT charge in these situations.
  • With many of us about to set off on our summer holidays, we consider the issues which may affect an employee’s holiday pay entitlement. This needs careful consideration following some cases held before the Employment Appeal Tribunal and the Court of Justice of the European Union

Please contact us if you have any questions regarding any of the articles we have included in our newsletter or if you would like further information on a topic we haven’t covered. Your views are always important to us and we would welcome your feedback.

Wellden Turnbull Spring 2015 Newsletter


  • Incorporation – A review of the two key changes which took place on 31st December 2014;
    • Corporation tax relief for goodwill, and
    • the prevention of individuals from claiming Entrepreneurs Relief on disposals of goodwill when they transfer the business to a related company.
  • PAYE – With the advent of RTI, and the changes that entails, HMRC are now taking a tougher line when it comes to smaller companies failing to file returns on time.
  • Reforming the tax on residences – As you will probably be aware from the Chancellors Autumn Statement, Stamp Duty Land Tax (SDLT) has been reformed. Your newsletter includes more detail on these changes, and what they mean for you.

In addition to these interesting articles we also include:

  • The future of the Construction Industry Scheme (CIS)
  • State pension ‘top ups’
  • NIC changes for the new tax year
  • Repairs and renewals and how HMRC view these for tax purposes