Last year George Osborne delivered the first budget of the new, Conservative, majority parliament and with this a huge change in how dividends are taxed. The move was quite unexpected and will have serious implications, for large amounts of owner managed businesses. The new rules are schedule to be introduced from 6 April 2016, only a few days away.
For a long while, company owners and accountants have been used to a situation whereby shareholders were remunerated by way of a low salary and received the remainder of their income by way of a dividend. Although the dividend was not an allowable expense for corporation tax purposes, the low rates of income tax meant that people saved a lot of money and therefore it is now a common structure.
The government has countered this strategy by introducing legislation to tax dividends at a higher level from 6 April 2016. They have effectively increased the level of tax on dividends by 7.5 per cent across the board. Therefore basic rate dividends have been increased from an effective rate of 0 per cent to 7.5 per cent; higher rate dividends from an effective rate of 25 per cent to 32.5 per cent; and additional rate dividends from 30.6 per cent to 38.1 per cent.
It isn’t quite as bad as it seems as there have been three introductions within the rules that slightly help the taxpayer. Firstly, the government has abolished the ‘notional tax credit’ on dividends. This was a tax credit that no one paid and no one received, however it counted towards your taxable income. Secondly, the government has introduced a £5,000 tax free dividend allowance. Thirdly the rate of corporation tax has been set to gradually reduce to 18 per cent on 1 April 2020.
The next thing you need to consider is how this affects you; you should be speaking to an accountant to make sure that you fully understand the rules; it is important so that you are well informed about your business. There isn’t much time left, but you might want to consider bringing some dividends forward so they are possibly taxed at 7.5 per cent less. You might also consider taking a lower amount of dividends; a lot of people take an arbitrary amount that is tax efficient, with careful planning it might be sensible to lower this, especially if you have a loan account to draw from instead.
Other points to consider:
- if you were considering incorporation, this will need to be revisited for the impact on your annual tax saving and any possible sale of goodwill and amortisation
- the impact on your private investments and any dividend stream you receive
- the impact on any trusts.
In conclusion, the new dividend rules are going to negatively affect a lot of people, but the amount each person is affected may vary widely. You should speak to Armstrong Watson as soon as possible to make sure you are doing what you can to mitigate tax, and to ensure you have a full grasp of the rules and their impact going forward.
Sharon Ryan and Steven Holmes are both tax consultants, at Armstrong Watson, contributing to the legal sector team Armstrong Watson has 15 offices and over 400 people. The legal sector team advises law firms throughout the UK on strategic, structural and other business improvement issues as well as providing efficient accounting, tax and SRA accounts rules services. Further information
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