As you probably already know, the way dividends are taxed is changing from 6 April 2016. These changes were made under the guise of simplification and modernisation but what they actually mean is an increase in the tax payable.
The good news is that with some tax planning before 31 March 2016, it’s possible to mitigate the increase, if not wipe it out altogether, for the next few years.
Currently dividends are taxed at 0% for basic rate tax payers, 25% if you pay higher rate tax and 30.55% for additional rate tax payers. From 6 April, all of these rates will increase by 7.5% (making them 7.5%, 32.5% and 38.1% respectively), although the first £5,000 will be tax free for everyone.
The owners of private companies, who generally have a small salary and take the rest of their income as dividends, are likely to be the worst affected.
Many of them are already asking “Should I pay a salary rather than dividends now?”
The easy answer is ‘no’, a small salary and dividends are still more tax efficient than a larger salary – but just not as efficient as before.
The next question is “How much worse off will I be?” and the answer to this is ‘It depends’. If you normally pay yourself a small salary and enough dividends to take your income up to £100,000, you will be paying around £12,000 tax at the moment. From 6 April, the tax payable will increase by around £4,500.
So what can we do? The first thing is look at accelerating some of your income (i.e. taking more dividends before 6 April 2016). This is certainly a good tax saving idea but there are some points that should be considered, such as:
- the tax will become payable sooner
- if the company can afford to pay extra dividends
- are there enough reserves in the company for it to declare a divided?
It’s easy to get this wrong and end up worse off so we would always advise that careful planning is required.
Unfortunately, accelerating your income is only a short term solution. Longer term planning could include:
- charging rent to your company if it occupies a property that you own personally
- charging interest on any money you are owed by the company
- selling assets you own personally to your company (again careful thought is needed before doing this, otherwise it may cause problems in the future)
- making sure that your spouse/civil partner or potentially your children are making the most of lower rates of tax.
With any of the first three points above it’s important to charge market rates/values so that you don’t pay any more tax than is absolutely necessary.
As always, if you’d like us to look at anything for you or if you have any questions please do get in touch on 01782 279615.