How might your business be affected by the proposed Dividend Tax Allowance?

Do you understand the current rules about dividends? Do you know that the government has announced changes in the recent budget which will completely change the rules relating to dividends? The chances you are probably not yet aware of these, so Steven Glicher accountants thought it might be beneficial to quickly bring you up to speed with the changes. What we should add at the outset, however, is that the proposed changes are, unfortunately, still something of an unknown quantity.

What’s the position about dividends now?

As things stand, dividends tend to be the preferred method of paying yourself for the owners of small companies and investors. They are the preferred choice because they are:

• That they are paid net of a notional 10 per cent tax credit. This tax credit can wipe out basic rate tax arising on dividends and goes towards covering the tax bill on dividends in the higher and additional rate bands
• They are not subject to National Insurance
• They are subject to lower income tax rates

What changes have been proposed?

In the Summer Budget, Chancellor, George Osborne, announced that from April 2016 the tax credit element will be replaced by a Dividend Tax Allowance of £5,000. The proposed changes mean that dividend income over that ‘allowance’ will be liable for tax at the basic rate of 7.5 per cent, 32.5 per cent for the higher rate and 38.1 per cent for the additional rate.

What are the proposed changes and why are they being introduced?

The only information available at the moment comes from a few paragraphs in the Budget document and a recently released HMRC factsheet, which gives a few examples of how the £5,000 voucher will interact with tax bands, rates and allowances. Whilst the factsheet has answered some of the questions surrounding the Allowance’s application for tax purposes, there isn’t yet any draft legislation to substantiate what is set out in the factsheet. Unfortunately, as yet the National Insurance bands for next year and the rates have not been confirmed. Therefore no one is in a position to commit themselves to 100 per cent accurate calculations at this time.

No one is clear about the motivation behind the proposed changes; however, what is known is that the government estimates the changes will generate an extra £6.8bn for the Treasury during this parliament. The government has also been trying to tackle ‘employees’ who disguise their employment as a trade using personal service companies. What’s more, there is also a sense that the government is looking to reduce incorporations that are predominantly tax-motivated- rather than being for commercial reasons, and by reducing the tax incentive to incorporate, it will indirectly reduce the numbers of people opting for these set-ups.

What will the changes mean for businesses?

Many small businesses already operate as limited companies and by virtue of their shares in their companies. Many unfortunately will be affected by these changes.

• Basic rate owner-managers
Naturally director-shareholders will tend to draw dividends right up to level where higher rate tax applies: by doing so they pay little-to-no income tax or National Insurance on any of their income. However, the company would be paying Corporation Tax though. Under the proposals, a similar set-up might cost each director-shareholder something in the region of £1,700 in tax.

• Higher rate and additional rate taxpayers
Due to the unusual application of the Allowance, some higher and additional rate taxpayers actually stand to benefit from the Dividend Tax Allowance. Dividends are always considered to be the very top slice of your income. If your dividends straddle two tax rates, the Allowance will first be used by the lower of the tax rates.
If you’ve got large amounts of other income and your dividends therefore fall entirely within the higher or additional rate bands, the Allowance could be worth up to £1,625 for higher rate taxpayers (£5,000 x 32.5%) or £1,905 for additional rate taxpayers (£5,000 x 38.1%).

How we can help?

Although more concrete details about the new Dividend Tax Allowances will not be available until late 2015 or early 2016, Steven Glicher accountants are happy to talk you through the proposed changes. Once the draft legislation is known we should be able to give you a more accurate idea of how your circumstances will be affected, and help you plan any necessary changes to your cashflow forecasts or budgets. For further information contact Steven Glicher accountants on 0161 485 8007 or email info@stevenglicher.co.uk

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