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Tax on dividends

Before April 2016 you could earn £42,000 of income from your company tax free by using a basic salary and dividends.  This changed from 2016/17 onwards and now just the first £5,000 of dividend income is tax free.  The rest is being taxed at either 7.5%, 32.5% or 38.1% depending on your income levels.

This means that a basic rate tax payer (who had no tax to pay at all previously) will now pay over £2,000 for 2016/17, plus 50% on account for the next year, so making a total payable of over £3,000 in January 2018.  There will also be a further £1,000 payable in July 2018.

If you’re a 40% tax payer earning say £112,000 in dividends and a basic salary of £10,000, you’re used to paying tax of just over £11,000 each January and July.  Under the new regime, you will have to pay an extra £10,000 in tax for 2016/17 plus an increased payment on account, so your tax liability in January 2018 will be in excess of £26,000 compared to the usual £11,000. You’ll also pay just over £16,000 in July 2018.

Unfortunately, it gets worse! If you earn £200,000 you are into the additional rate tax band of 38.1% and you used to pay tax of just over £21,000 each January and July.  Under the new regime, you will have to pay an extra £18,000 in tax for 2016/17 plus an increased payment on account, so your tax liability in January 2018 will be in excess of £48,000 compared to the usual £21,000, with a further £30,000 payable in July 2018.

If you’re a family business, these figures might well be multiplied across several tax payers to give you a very large tax liability in January 2018.  So it’s really important that we do your tax return as soon as possible, then consider the tax planning opportunities available to you and your family.  And as we said in our introduction, you need time to discuss any cash flow requirements you may have with your bank well ahead of January 2018.

Buy-to-let residential properties

Many of us have opted to invest in residential property as part of our retirement planning, while other tax payers might earn the majority of their earned income from large property portfolios. Either way, the tax changes introduced in April 2017 affect us if we have borrowings on these residential properties.

In essence, the tax relief you currently receive on your interest payments is being cut between now and 2021.  Ignoring any other income you may have, here’s an illustration of how your tax liability will change:

Let’s assume you have:

  • rental income of £100,000
  • general expenses of say £25,000
  • interest payments of £25,000, so leaving you a net profit of £50,000.

Your income tax liability on this is £9,200 in 2016/17 and this will rise to £14,200 by 2020/2021 – an increase of over 54% on the same profit figure.  You might not think this is too bad, but take a look at the figures with higher interest payments of £50,000:

So here you have:

  • rental income of £100,000
  • general expenses of say £25,000
  • interest payments of £50,000, so leaving you a net profit of £25,000.

Your income tax liability on this profit is £2,800 in 2016/17 and this will rise to £9,200 by 2020/2021 – an increase of nearly 330% on the same profit figure.

If you have a very large portfolio with a high levels of debt associated with it, you can be faced with a tax liability which is actually higher than the profit you’re making:

Let’s assume you have:

  • rental income of £400,000
  • general expenses of say £50,000
  • interest payments of £300,000, so leaving a net profit of £50,000.

Your income tax liability on this profit is £9,200 in 2016/17 and this will rise to a staggering £83,600 by 2020/2021 – yes, £83,600 of income tax on a profit of £50,000 which is crazy.

The good news is, there’s a number of ways we can help you reduce these tax liabilities by using a limited company, gifting properties to others, re-mortgaging etc. It can often be necessary to implement a staged plan over a period of time, so do please get in touch with Michael Burgess or Rebecca Thorley before these tax liabilities start to bite on 01782 279615.

 


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