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

Posted by Wellden User

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.

The future of the Annual Investment Allowance

Posted by Wellden User

The Annual Investment Allowance (AIA) provides an immediate deduction to many business for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit.

The maximum annual amount of the AIA was increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015. George Osborne has now told us in the Summer Budget what the ‘permanent’ amount will be from 1 January 2016. It is £200,000.

What have also been confirmed are the transitional provisions to calculate the amount of AIA in an accounting period which straddles the date of change.

Two calculations need to be made:

1. A calculation which sets the maximum AIA available to a business in an accounting period which straddles 1 January 2016.
2. A further calculation which limits the maximum AIA relief that will be available for expenditure incurred from 1 January 2016 to the end of that accounting period.

It is the second figure that can catch a business out. For a company with a 31 March year end, under calculation 1 the company will be entitled to up to £425,000 of AIA (9/12 x £500,000 + 3/12 x £200,000).

However for expenditure incurred on or after 1 January to 31 March 2016 the maximum amount of relief will only be £50,000 (3/12 x £200,000).

So check with us what will be the tax efficient capital expenditure limits between 1 January 2016 and the end of the accounting period for your business.

We can also provide expert tax planning advice on capital gains tax, corporate tax, and VAT. Contact us today to make a confidential appointment to discuss your corporate finance needs.

Dividend tax credits replaced by new allowance

Posted by Wellden User

Dividend tax credits will be replaced with a new £5,000 tax-free allowance from April 2016, the Chancellor George Osborne announced during his Summer Budget statement.

Under current rules dividend income is reduced with tax credits. Basic rate taxpayers currently pay no tax on dividend income while higher rate taxpayers are charged 25% and additional rate taxpayers 30.55%.

From April 2016, investors will pay no tax on dividend income below £5,000 but income exceeding the allowance will be taxed at the following rates:

  • Basic rate taxpayers: 7.5%
  • Higher rate taxpayers: 32.5%
  • Additional rate taxpayers: 38.1%.

The dividend allowance will be in addition to the £1,000 personal savings allowance for income such as bank interest.

Sean McCann, chartered financial planner at NFU Mutual, urged investors to review their stocks and shares portfolio:

“A new £5,000 tax-free allowance on dividends sounds great but there will be winners and losers. Basic rate taxpayers won’t be any better off. In fact, basic rate taxpayers with more than £5,000 in dividend payments will start paying tax on their dividend income.

“What is clear from today’s announcement is that anyone with stocks and shares should review their investments to make sure they aren’t paying any more tax than they have to.”

However, Anthony Thomas, chairman of the Chartered Institute of Taxation’s Low Incomes Tax Reform Group, welcomed the move:

“For some the new dividend allowance will offer a useful simplification, although it is possible that some people on modest incomes will now have to start paying tax on their dividend income and be brought into self-assessment in order to collect what is due from them.

“That apart, the dividend allowance together with the £1,000 personal savings allowance will encourage more individuals to save outside of the constraints of an ISA.”

Contact us to discuss what the Summer Budget 2015 means for you and your business’ finances.

 

 

Summer Budget Summary 2015

Posted by Wellden User

Free from the constraints of coalition government George Osborne has just delivered his second budget of the year, and the first Conservative budget in almost two decades.

In this Summer Budget, Mr. Osborne has set-out to implement some of the Tory party’s election pledges, whilst revealing the full scale of cuts ahead for both public services and welfare payments.

Recognising that not everything within this budget is necessarily of relevance or importance, Wellden Turnbull Director ‘Robin John’ took a moment to summarise what the measures could mean for you and your business, including the following:

  1. Dividend Tax
  2. Effective Tax Rate
  3. Non-Domiciled Individuals
  4. Foreign Owned Residential Property
  5. Tax Depreciation for Goodwill
  6. Buy-To-Let Landlords

Click on the video above to hear what Robin John has to say about the Summer Budget.

Summer Budget 2015: First Reactions

Posted by Wellden User

The Chancellor George Osborne has delivered the first all-Conservative Budget statement in almost 20 years. Here is a collection of snap reactions from the UK’s leading business groups:

Federation of Small Businesses

John Allan, national chairman of the FSB, said that the Chancellor has unveiled a “mixed bag of proposals”:

“There was further support to reduce corporation tax, fix the annual investment allowance and boost regional growth, where investment in roads will be particularly well received.

He agreed with the emphasis placed on boosting productivity but voiced concern about the introduction of a national living wage:

“However, even though offset by a welcome increase in the employment allowance, some will find the new national living wage challenging. Changes to the treatment of dividends will also affect many of our members.”

Confederation of British Industry

CBI director general John Cridland agreed that it was a “double-edged” Budget for businesses:

“Firms will welcome measures to balance the books and boost investment, but they will be concerned by legislating for wage increases they may not be able to deliver.”

British Chambers of Commerce

John Longworth, director general of the BCC, was more positive about the Chancellor’s statement and praised his “genius balance of politics and economics”:

“The Chancellor has confirmed that Britain is open for business. Firms across the UK will cheer not just the new permanent Annual Investment Allowance, further Corporation Tax reductions, and lower National Insurance for small businesses, but also commitments to childcare and higher education that help them employ Britain’s best.”

He added that businesses will want assurance that the move to create a national living wage would follow an “evidence-based approach that will minimise the impact on small businesses for whom the adjustment will be harder.”

Institute of Directors

Simon Walker, director general of the IoD, said that the Chancellor’s announcement of a new living wage was “dramatic” but argued that businesses have been sufficiently compensated in other areas:

“In return [for a national living wage], companies have been provided with a cut to corporation tax and an increase in the employment allowance. We should not understate the boldness of this move, and many businesses will have been taken by surprise, but the IoD accepts that after several years of slow wage rises, now is the time for companies to increase pay.”

To read the announced changes in full, please click here to download a free copy of our Summer Budget Summary