Tax On Dividends From 06.04.16

NEWS FOR DIRECTORS AND SHAREHOLDERS

TAX EFFICIENT EXTRACTION OF PROFITS

In his summer 2015 Budget, the Chancellor announced far-reaching reforms to the way in which dividends are taxed. If you are the director of a personal or family company and extract profits in the form of dividend, this will affect you.

Under the rules as they currently stand, it is preferable from a tax and National insurance perspective to operate as a limited company and to take a small salary to preserve entitlement to the state pension and certain contributory benefits and to withdraw additional profits in the form of dividend. Although dividends must be paid out of after-tax profits (once corporation tax has been paid), withdrawing profits as dividend has a number of advantages:

No National Insurance contributions are payable on dividend: and

The availability of the 10 per cent tax credit attaching to dividend means that there is no further tax to pay until total income reaches the threshold at which higher rate tax becomes payable (£42,385 for 2015/16). Thereafter, the effective rate of tax on the net dividend is 25% for a higher rate taxpayer and 30.6% for an additional rate taxpayer.

What is changing? From 6 April 2016 the 10% tax credit on dividends is being abolished. This means that it will no longer be necessary to gross up the amount of dividend actually paid to take account of this tax credit or to deduct the tax credit from the tax that you owe – the amount paid by your company will from 6 April 2016 be the gross amount of the dividend.

To compensate for this loss of tax credit, a new tax-free allowance of £5000 will be available for dividends. Once this allowance has been used up, dividend income will be taxed at the appropriate dividend tax rate, which will be 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer and 38.1% for an additional rate taxpayer.

This means that anyone whose dividends are taxed at the basic rate and who, once the personal allowance has been used up, has dividend income of more than £5,000 a year will pay more tax on their dividends from April 2016. It will no longer be possible to pay a small salary (covered by the personal allowance) and to then pay dividends until the higher rate threshold is reached without having to pay any further tax on those dividends. It will also be necessary to ensure funds are available to pay the additional tax that will be due on the dividends.

Although the new dividend rules do not come into force until 2016/17, it is also advisable to review your dividend extraction strategy for 2015/16 as it may be beneficial to accelerate dividend payments to before 6 April 2016 to take advantage of the more favourable dividend tax rates applying before that date.

Case Study:  a jointly owned man and wife company. In 2015/2016 each receives a salary of £10,600 and a dividend of £28,606 net (£31,785 gross). There is no further tax to pay. If they adopt a similar strategy in 2016/2017 and pay a salary equal to the personal allowance which is set at £11,000, and a dividend of £28,606 (the same as in 2015/2016) their tax position is quite different:-

The first £5,000 of the dividend is covered by the new tax-free dividend allowance. The balance of £23,606 is taxed at the new dividend rate of 7.5% giving rise to a tax bill of £1,770 each.

As a result of the changes, as a couple they pay £3,540 more on the same dividend in 2016/2017 than in 2015/2016.

If in 2016/2017 they pay a dividend to utilise the full basic rate band set at £32,000 for 2016/2017 they will each pay tax of £2,205.

One-man companies to lose employment allowance it should also be noted that the National Insurance employment allowance will increase to £3,000 but this will not be available to companies where the director is the sole employee from 6 April 2016 onwards. For personal companies this will affect the optimal salary level and impact on the profit extraction strategy.

Self Assessment Penalties

Have you filed your Tax Return for the year ended 05.04.2011? Which was due by 31.01.2012?

 

If not then as from 30.04.2012 HMRC will apply penalties of £10 per day for every day your return is left outstanding and will charge for up to 90 days if it remains outstanding. This penalty is in addition to the fixed £100 penalty charged on 01.02.2012.

If you owe tax you will also pay 5% penalty of the total amount of tax outstanding for late payment, but this does not include the payments on account.

Why pay more, Dont delay call us for assistance 015395 36163 or email gemma@bfmsltd.co.uk

 

Understanding those ‘payments on account’

Payments on account

The tax that you have to pay by 31 January is the tax due on earnings in the tax year from 6 April to the following 5 April.

In addition HMRC require a further ‘payment on account’ which equals 100% of the tax that you paid during the year 6 April to 5 April in two installments. The first installment has to be paid by 31 January aswell as the tax due for the year. In effect this is a payment towards the current year. The second payment is due 31 July.

How is this calculated

You’ll have to make payments on account if your previous year’s tax was over £1,000 – unless more than 80 per cent of the previous year’s liability was covered by tax taken off at source (i.e CIS or PAYE)

What happens to these payments

The payments on account that are made are held in your account with HMRC and are offset against the next tax return due. So if your tax bill was £2000 for the year ended 5 April 2011, you would pay £3000 on 31 January 2012 (the total tax due and a further 50% of the total tax due towards next year) and then a further £1000 on 31 July 2012. When assessing your tax for the year 5 April 2012, you have already paid £2000 towards the next bill.

Can this be adjusted

If your circumstances have changed and the projected earnings for next years tax return have reduced, or you have tax deducted at source, your accountant can make an application to reduce these payments for you. And if you want to pay more, this can also be arranged.

Self Assessment Diary 2011/2012

31 July 2011

Second interim payment of income tax due for 2010-11, where required.

Second 5% surcharge on unpaid 2009-10 tax.

31 October 2011

Deadline for submission of 2010-11 paper tax returns.

31 January 2012

Deadline for submission of 2010-11 tax returns where submitted online.

Taxpayer sends balancing payment required of 2010-11 liability to income tax and capital gains tax.

First interim payment of income tax due for 2011-12, where required.

28 February 2012

5% surcharge on unpaid 2010-11 tax.

31 July 2012

Second interim payment of income tax due for 2011-12, where required.

Second 5% surcharge on unpaid 2010-11 tax.

31 October 2012

Deadline for submission of 2011-12 paper tax returns.

31 January 2012

Deadline for submission of 2011-12 tax returns where submitted online.

 

HMRC Penalties for missing the tax return deadline

1 day late:
A fixed penalty of £100. This applies even if you have no tax to pay or have paid the tax you owe.

3 months late:
£10 for each following day – up to a 90 day maximum of £900. This is as well as the fixed penalty above.

6 months late:
£300 or 5% of the tax due, whichever is the higher. This is as well as the penalties above.

12 months late:
£300 or 5% of the tax due, whichever is the higher.
In serious cases you may be asked to pay up to 100% of the tax due instead.
These are as well as the penalties above.