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
Summer budget review: the dash to declare dividends
The Chancellor announced in his Emergency Budget in July that there would be significant changes to the tax on dividends. These will be introduced from 6 April 2016. The changes represent good news for those holding shares as an investment, as the first £5,000 of dividends will be tax free. However, the position is distinctly less favourable for those using dividends to remunerate themselves from a personal or family company, as is explained further below.
Under the current rules, only dividends exceeding the basic rate band are taxed. This means that a taxpayer could potentially receive dividend income of £42,385 without any tax liability. The new rules will tax any dividends over £5,000 at 7.5%. Once the changes are introduced, only £16,000 of dividend income can be declared tax free. Further to this, the tax rates for dividends exceeding the basic rate band have increased significantly, as shown in table 1.
When first announced, it was hoped that the £5,000 allowance would be in addition to the personal allowance – giving a potential £16,000 tax free dividend before indenting the basic rate band. However, the guidance indicates that the first £5,000 will not be an extra allowance but will instead be taxed at 0%. This difference is important as this will reduce the available basic rate band and now more income could be taxed at a higher tax rate.
For those taxpayers with dividend income which spans the basic rate and higher rate bands, relief will be given for the dividend falling in the basic rate band first. Where dividend income exceeds the £5,000 tax free limit, the taxpayer is at a disadvantage compared with the current rules.
Table 2 shows the increase in tax due on the same dividend based on the initial guidance if a taxpayer only received dividend income.
If currently incorporated, it may be favourable to take advantage of the lower rates now and declare additional dividends before 5 April 2016. Now is the time to compare the potential tax cost of taking salary and dividend to ensure that your remuneration package remains tax efficient once the changes to the rules take place and to utilise current rates in certain circumstances.
If you are considering incorporation, now is also the right time to seek advice on the most efficient structure for your circumstances in light of the new rules. Considering the costs associated with incorporation, the changes to dividend rules could mean that incorporation is no longer the most efficient option for your business.
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