Name: Aileen Gates
Company: Campbell Dallas
Aileen Gates is a partner at Campbell Dallas, Chartered Accountants. Email Aileen with your financial queries and she will answer in following issues of BWS magazine. e: email@example.com
Back to School, Again
The decision to educate your children privately has many benefits but it also creates costs in the form of school fees and associated expenditure (such as school uniforms and extra-curricular activities) which must be paid for from income that has already been taxed, often at 40% or 45%. A structure that can make the costs more affordable is thus worth considering.
In a previous BWS article I discussed how it was possible for an individual with a stake in their own business to structure the payment of their family’s school fees to reduce the effective cost. With this month’s issue focusing on Private Schools it seems like a good time for a brief reminder about the availability of the planning and how it can help parents, who fund their children’s school fees via dividends, to reduce the impact of the higher taxes on dividends announced in the 2015 Summer Budget.
How does the planning work?
The planning is suitable for any individual who has a stake in their own business and can thus extract income via dividends. A basic feature of the planning is the establishment of a trust which will be gifted shares in the family business. The rights attached to the trust shares will ensure that control of the business and its underlying capital value remains in the hands of the existing shareholders. Dividends are then paid to the trust to allow it to meet the school fees of the beneficiaries. The potential tax savings of this planning for an individual who has two children at a private school with annual fees of £8.5k each, and pays tax at 40% could be over £11k per annum.
Is it just for paying school fees?
No. The planning can accommodate other costs such as nursery and kindergarten fees, funding extra-curricular activities, school trips, university living costs or even supporting an elderly relative. As the planning is different for any two taxpayers it can be designed to fit your family’s circumstances.
How is the taxation of dividends changing?
At present any dividends are treated as being taxed at source and no additional tax liability arises if the recipient is a basic rate taxpayer. Higher and additional rate taxpayers will pay at effective rates of 25% and 30.6% respectively. In the 2015 Summer Budget it was announced that dividends would no longer be treated as taxed at source from 6th April 2016. The tax rate on dividends for basic rate taxpayers will be 7.5%. Higher and additional rate taxpayers will pay tax at 32.5% and 38.1% respectively. This increase in the level of taxation of dividends will only be partially offset by the new £5k tax-free dividend allowance, which will be available regardless of an individual’s other income.
How can the planning reduce the impact?
Individuals who currently fund their children’s fees via dividends will find that the tax cost of doing so will increase due to the higher rates. Implementing the planning will generate tax savings by allowing up to £16k to be paid per child without a personal tax charge arising, in respect of that income, through the use of the children’s personal allowances.
Campbell Dallas would be pleased to provide these services to you.
If you would like to explore this issue further or have any general tax questions, please do not hesitate to contact Aileen Gates at firstname.lastname@example.org or telephone us on 0141 886 6644