With the new tax year fast approaching, there is still 3 weeks to consider taking additional dividends where appropriate, before the reform of tax on dividends.
Here is a reminder of the changes:
The Current Rules
A 10% non-refundable tax credit is added onto dividends, then they are taxed at 10% up to the basic rate tax band and 32.5% after this. Resulting in an effective rate of tax of 0% up to the basic rate threshold and 25% thereafter.
From 6th April
· The 10% tax credit is abolished
· The first £5,000 of dividends are tax free
· The balance of the basic rate band will be taxed at 7.5%
· Higher rate will be taxed at 32.5%
· The additional rate will be taxed at 38.1%
To put the changes in monetary terms, a typical client will take a salary of £8,052 and pay dividends to the higher rate band for 2015/16 & 2016/17. The key figures are:
Due to the abolition of the tax credit and additional £3,967.30 can be taken in dividends before hitting the higher rate.
Additional tax due is £2,246.10
Clients that I have spoken to about this fundamentally have the same two questions:
1. Is it still more tax effective being a limited company
At the moment yes, running the models through businesses trading with profits of £50k a year have a £2,414 saving per annum still, and profits of £25k have a £514 saving per annum. Based on the announcements in the budget these savings will increase as the main rate if corporation tax will fall.
2. What tax planning opportunities are there?
For clients that exceed the 40% threshold it may be advisable to pull a larger dividend before 5th April 2015 so that you are paying an effective rate of 25% rather than 32.5% from 6th April.
For clients that have available 40% tax bracket taking dividends before 5th April 2015 rather than after.
Increasing pension contributions and reducing dividends.
Please do not action any of the tax planning suggestions without taking professional advice, as every person’s situation differs, and there may be other commercial / legal factors which need to be taken into consideration.