Imminent changes to the way tax on dividend revenue is calculated are likely to have huge implications for business owners
Anyone running a limited company and remunerating themselves in the form of minimum salary and maximum dividends is going to be paying significantly more tax on their earnings after the new tax year starts on 6th April.
At the moment, as long as you’re a basic rate tax payer and your total earnings from all sources (including dividends) keep you below the higher rate threshold, dividends are effectively tax free.
And if you become a higher rate tax payer, you will be required to pay 25% of any surplus dividend you take in tax.
But from April, the government is introducing a £5k tax allowance on dividends irrespective of how much you earn.
Any dividends you take above this allowance will be taxed as follows:
7.5% for basic rate tax payers
32.5% for higher rate tax payers
What should you do?
Any business owner who is going to be affected by this change – and that’s likely to be virtually everyone paying themselves a dividend, needs to take action in order to minimise the impact on their earnings. There are two key things you need to do:
1. Review your financial position NOW!
The change is only a matter of weeks away, but if you act promptly, there’s still time to make the most of the current tax system as it applies to dividends. You will need to undertake a full review of your position in order to ascertain what funds are available to take as dividends. Getting an accurate estimate of how much profit is available is essential, as dividends can only be distributed on profits after a provision for Corporation Tax has been made.
Assuming there is profit available, you will almost certainly want to take advantage of the preferential tax treatment that’s still available to you until 5th April. You might do this either by paying yourself an extra one-off dividend, or taking an early dividend, bringing forward income you were going to pay yourself in the first quarter of 2016-2017 anyway. Even though this may mean you paying tax early, it’s going to be less than the tax you’ll have to pay if you wait and take your dividend under the new scheme.
Someone currently earning £10k in salary and £40k in dividend for example, will have to pay higher rate tax on around £10k of their dividend income after 6th April, so they might want to consider taking an extra £10k before the end of the current tax year, paying tax on it, and forgoing £10k in dividend in the new tax year.
If you are considering ‘front loading’ or maximising your dividend income before the end of the current tax year, be careful not to create problems in other areas. Child benefit for example starts to reduce when income exceeds £50k, disappearing entirely at £60k, while your personal tax free allowance will start to reduce when your income exceeds £100k.
2. Review your shareholding structure
In light of the upcoming changes, owners of limited companies would be well advised to review their shareholding structure. Under the current tax scheme, there is no advantage to appointing a new shareholder who is already a higher rate tax payer, but under the new scheme, this will no longer be the case.
From April 6th, everyone will be entitled to a £5k tax free dividend allowance whatever their tax situation, and this presents the opportunity to make a spouse or civil partner a shareholder in the business, reducing the tax burden on the family unit. Doing this, it would be possible to save around £1,625 (32.5% of £5k) every year.
Let Inca Advise You What to Do Before 5th April
Inca can review your financial position, confirm exactly how much profit is available to you to take as dividend before 5th April, and advise you on the options open to you. Looking further forward, we can review the shareholding of your business and advise if there is a more cost-effective way to structure it. Take action now to protect your earnings!
Give us a call, drop us an email or request a call back and let’s get the ball rolling.