What is a dividend?

What is a dividend?

ˈdɪvɪdɛnd/

noun

1. a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves).

 

Janna Beeching, Director of Accounting and Tax at Intouch Accounting helps Limited Company contractors every day. Here she shares some of the more commonly asked questions she’s asked about how much to take in dividends and when’s the right time…

 

What exactly is a dividend and how do Limited Company contractors benefit from them?

A dividend is a payment to the owners (shareholders) of the business, intended to be a return on the money invested (in share capital) by them.

 

Where a company makes a profit after corporation tax and has the available cash flow to meet all its liabilities as they become payable and meet its current needs then the company has distributable profits available to be paid as a dividend. The amount of a dividend that can be paid is cumulative. Therefore any historic profits not previously paid out are available alongside current year profits.

 

Directors have a duty to the company to ensure that it can meet its liabilities. There may be circumstances where profit is available but there is insufficient cash balances held to meet the dividend and pay taxes and other liabilities. This is where most care is required.

 

A dividend can only be paid to shareholders. Each shareholder is entitled to a proportion of total dividends according to the proportion of the shares they hold.

 

Dividends are not earnings for PAYE purposes and are not subject to income tax and National Insurance in the same way as salary. Dividends are subject to different tax rules, and it is these rules that provide the benefit of dividends over salary.

 

When can dividends be drawn from your company?

Before a contractor does anything they should determine their IR35 status. A contractor inside IR35 may not be able to pay dividends.

 

Technically, there are two types of dividends:

1. Interim dividends – are paid to individuals throughout the year and only require a decision by the directors. However they are capable of being overturned by the shareholders

2. Final dividends – are paid once the company’s annual accounts have been completed and determined by the shareholders, they cannot be overturned.

 

As a contractor’s Limited Company is traditionally made up of one person as both director and shareholders (or husband and wife) the distinction is less important. However, despite the less formality they should still conduct the declaration of dividends properly.

 

A dividend declaration is made by the directors passing a resolution. That resolution sets out the amount of the dividend and the date it is payable. If no date is given then it is payable on the date of the resolution.The payable date is the date that is used for determining the tax year in which the income is included.

 

It’s important to consider the payable date as this it could be beneficial in aiding your tax planning.

 

Paperwork

Dividend declarations must be agreed upon by the company’s directors and this is traditionally decided during a meeting and the passing of a resolution. If you’re the only director of your Limited Company you must still produce paperwork.

 

Dividend paperwork comprises of:

 

Resolution

This is a record of the formal decision taken by the director(s). It states the amount of the dividend and the date it is payable. The resolution is very important. HMRC will consider this evidence that the payment is indeed a dividend and not salary or a loan.

 

Dividend Voucher

Each shareholder has their own individual entitlement to a dividend declared. The voucher is a document that sets out that individual entitlement.

 

Illegal dividends

As stated by the The Companies House Act 2006, section 830, ‘a company may only make a distribution out of profits available for purpose’.

 

In short, this means that as long as your company has enough undistributed profits to date, after tax, and can meet all of its tax liabilities the dividend can legally be declared.

 

If a dividend is paid but the company cannot meet its tax liabilities it is considered illegal; and must be repaid by those that are aware, or should be aware, that it is illegal. For contractors, this would normally mean the directors and shareholders.

 

HMRC normally treat illegal dividends as loans to the directors/ shareholders and then tax them at a rate of 32.5%.

 

What are the benefits of dividends?

Dividends are beneficial in terms of how they are taxed and the ability to pay them to shareholders rather than employees.

 

What is the dividend tax rate?

From 6 April 2016 the rate at which dividends are taxed changed. The first £5,000 of dividends fall within the nil rate:

 

2015 rates Rates from 6 April 2016
Nil Rate 0% 0%
Falling within basic rate 0% 7.5%
Falling within higher rate 25% 32.5%
Remainder 30.5% 38.1%

 

Use our free dividend calculator to work out how much tax you’ll pay on your dividends this tax year.

 

Visit HMRC’s website if you need further information on the changes to dividends and how they might affect you.
Got questions about dividends? Our Personal Accountants provide expert, tailored advice to our clients on when they can take dividends and how much. Speak to our team today to find out more.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Dividends – how often should I take them, and when are they actually taxed?

Dividends

Dividends can sometimes be difficult to understand and many contractors find themselves wondering when they should take them and when do they actually get taxed?

 

In this blog our Director, Duncan Strike answers these two questions and covers the timing and tax point of dividend declarations.

 

Question 1: When are dividends taxed? Is it when they’re paid, or the date they’re declared?

 

Neither of these answers are correct. A dividend will be included on your tax return, according to the date the dividend was declared as becoming payable. The date it was paid is not relevant.

 

For example:

A dividend declared 1 April 2016, that was paid on 7 April 2016, is included as income for the 2016/17 tax year. The amount would be classed as a loan, if it was paid on 4 April, until 7 April. It would not change the tax year it’s regarded as a dividend.

 

Remember! Should HMRC decide to investigate, in order to support all dividends, keep copies of all dividend vouchers and minutes. Your contractor accountant should have a dividend template for you to use, then simply send them a copy every time you use it.

 

Tax planning opportunities

If you have some of your basic rate tax band left, have sufficient profits in your company and for whatever reason, you don’t want to pay yourself a dividend at that time, you’re able to declare a dividend immediately payable, if you intend to take the cash at a later date. This means you can fully utilise your tax allowances year on year, as it ensures the dividend falls into a specific tax year.

 

Don’t forget that as of 6 April, the new £5,000 dividend tax was introduced. It’s worth taking at least £5,000 in dividends, as this amount is tax free, regardless of which tax band you fall into. Use our new dividend calculator to find out how much you’ll pay in dividend tax this tax year.

 

Question 2: How often should you pay yourself dividends? What are the dangers of monthly payments looking like disguised salary?

 

We generally recommend our clients to pay themselves dividends, either monthly or quarterly. You can, however, pay them to yourself whenever you wish.

 

As long as the correct dividend voucher and minutes paperwork are in place and your company has sufficient funds to cover the distributions, there’s little chance that HMRC will see your dividends as salary.

 

We do advise all clients to keep their salary and dividend payments completely separate from one another and pay all shareholders separately in the correct proportions, so that a clear audit trail can be provided. Should you be subject to an HMRC review, having clear audit trails in place can make all the difference, as every item is easy to trace and nothing has been missed or hidden.

 

If you’re looking for specialist, tailored advice regarding dividends, that’s unique to you and your circumstances, speak to our team today to find out how Intouch can help you. Our Personal Accountants are here to be your guide, to ensure you get the best and most from contracting.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

The new tax year – how today’s changes could impact your contracting life

The new tax year

Today marks the start of the new tax year, that will bring changes which could affect many contractors’ take home pay. In this blog we outline the top 10 changes, to ensure you’re fully prepared.

 

1Dividend allowance

The first £5,000 you take in dividends annually will be tax free (this is on top of the income tax personal allowance), then anything over that will be taxed at the following rates:

Basic rate: 7.5%

Higher rate: 32.5%

Additional rate: 38.1%

 

Our new dividend calculator will give you a clear indication as to how much more tax you’ll pay for 2016/17.

 

Tax will not be deducted at source and taxpayers will have to use their Self Assessment Tax Return (SATR) to pay any tax owed. So basic rate taxpayers receiving £5,000 or more must complete a SATR.

 

2. Capital Gains Tax (CGT) will reduce

If you sell an asset that has gone up in value, then CGT is the tax you will have to pay on that asset. Depending on the rate of income tax you pay, CGT will either be payable at the basic or higher rate. If you’re selling residential property, CGT only applies to any additional properties you may have (other than your main home).

 

From today the rates for CGT are:

Basic rate: cut from 18% to 10%

Higher rate: cut from 28% to 20%

 

3. Flexible ISA

From today should you wish to withdraw and replace your ISA funds within the same tax year, you will not lose the full ISA tax benefits.

 

If you have money in stocks and shares ISAs you should also be able to do the same, if you withdraw and replace via a cash trading account.

 

4. Personal Saving Allowance

Anyone aged 18 + will be able to earn up to £1,000 a year on their personal savings – tax free.

Take a look at the tax rate bands to see how you can benefit:

  • Basic-rate (20%) taxpayerscan earn £1,000 of savings tax free (saving a maximum of £200 compared with 2015/16 tax year).
  • Higher-rate (40%) taxpayers can get a personal savings allowance of £500 (saving a maximum of £200 compared with 2015/16 tax year).
  • Additional-rate (45%) taxpayers earning above £150,000: £0unfortunately do not get an allowance.

 

See the Treasury’s factsheet for more information. The Personal Savings Allowance is being dubbed as the ‘biggest savings shake-up for a generation’, so don’t miss out!

 

5. Income Tax and Personal Allowance thresholds increase

Taxable income rate: from today will rise from £10,600 to £11,000

Higher rate income tax: the 40p threshold will rise from £42,385 to £43,000

 

6.New State Pension is introduced; current state pension rises

You will receive the new State Pension if you retire today and are:

Female: born on or after 6 April 1953

Male: born on or after 6 April 1951

 

The flat rate State Pension is £155.65 per week but the amount you’ll receive will depend on your National Insurance (NI) contributions:

35 years of NI contributions: you qualify for the full allowance

At least 10 years of NI contributions: to qualify for part of the weekly allowance

Less than 10 years of NI contributions: you will not receive any of the State Pension

 

If you retired earlier, you’ll receive the old state pension, which will increase to £119.30.

 

7. Innovative Finance ISA (IFISA) will launch

If you use peer-to-peer (P2P) platforms to save then the new IFISA will allow you to get tax free returns. Whilst one of the attractive qualities is the higher rates of interest, it’s worth being aware that P2P isn’t protected by the Financial Services Compensation Scheme (FSCS).

 

8. Lifetime Allowance cut

Today will see a reduction in the amount you can save into your pension without a tax charge – AKA your Lifetime Allowance – from £1.25m to £1m. Your pension benefits are tested against the lifetime allowance as soon as you start to draw your benefits.

 

Despite the government’s claims that the reduction will only impact 4% of the wealthiest population, it will also hit those people working hard to save for retirement. You can protect your pot if it exceeds the Lifetime Allowance.

 

Remember! Be careful with Auto-Enrolment, as any contributions you make could wipe out any protection you may have. We advise that you discuss this with an Independent Financial Adviser, to ensure you have the right advice and support for you and your circumstances.

 

9. Annual Allowance Taper will be introduced

For higher earners, the annual pension allowance will gradually be reduced. At present it’s set at £40,000, but the government is set to introduce a taper system that will reduce the limit for those whose income exceeds £150,000. The reduction rate will be set at £1 for every £2 of income, meaning that if you’re earning £210,000 or more, your annual allowance will be reduced to £10,000.

 

10.National Living Wage and Stamp Duty Land Tax increases

Both have already been enforced, as from 1 April:

 

National Living Wage (NLW): anyone aged 25 or over will receive £7.20p/h, an increase from the previous NLW of £6.50p/h.

Stamp Duty Surcharge: an additional 3% has been added onto the current stamp duty rates for anyone who purchases a second home or a buy-to-let property. Whether you’ll have to pay or not will depend on your individual circumstances. But it is likely to hit tenants who are charged more rent to cover the additional cost to their landlord’s.

 

So there you have it, 10 changes for the new tax year that every contractor should be aware of. If you’re wondering what these changes will mean for you, we’ve created our top 10 new tax year resolutions to aid contractors in staying financially fit this new tax year. Download them today for the ultimate in contracting success.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Contractors urge Osborne to keep his focus in this week’s Budget

This week’s Budget

The pre-Budget media train has been in full motion over the weekend with genuine personal service companies (PSCs) all being wrongly tarred with the same tax avoiders brush. Trading through a personal service company is perfectly legal and above board. That is the correct starting point.

 

Surely if that premise was untrue all of these heinous crimes would have lead to fines or custodial sentences, or perhaps just changes to the legislation to catch the baddies. But that hasn’t happened.

 

FCSA is rightly pleading with Osborne to ”get his facts right before tarnishing all contractors with the same brush ahead of Wednesday’s Budget”. Contractors and freelancers are a valuable part of the UK’s workforce and those operating legitimately should not be punished as government look to clampdown on abusers.

 

Intouch supports tightening of the rules to make the system fair and just, but are singing from the same hymn sheet as FCSA in urging government not to attach genuinely independent workers who bring their highly valuable knowledge and experience into companies when they’re needed.

 

What’s likely to come up on Wednesday for contractors?

Contractors are already expected to deal with changes to the way dividends and expenses are taxed. Here’s what will be of interest on Wednesday lunchtime:

 

  • Dividends – the current tax credits will go and the new dividend tax kicks in on 6th April. Our Dividend ebrief tells you more about the new rules, what they mean and what you can do to make the most of your dividends.
  • Travel and subsistence expenses – any contractors who are under the supervision, direction or control (SDC) of their client will lose tax relief of their T&S expenses. This is likely to hit Umbrella workers the hardest as well as any contractors operating within IR35.
  • Stamp duty on second homes – any contractors with a second home will have to pay a 3% Stamp Duty surcharge.
  • IR35 – silence was golden in the Autumn Statement in which IR35 was put to one side. But we’re expecting it to raise it’s head again now Spring is here. The discussion document issued last year will most likely progress to consultation and we already know to expect an improved Employment Status Indicator Tool by the end of this year.
  • Income Tax threshold – it’s expected that the Personal Allowance will rise to £11,000. We also anticipate seeing the higher rate income tax threshold rise, probably to £43,000, as government continue to edge towards their longer term target of £50,000.
  • Company liquidations – changes likely to come into effect on 6th April mean any contractor looking to wind up their company but then continue contracting will have their distributions chargeable to Income Tax, rather than Capital Gains Tax. In short, this is a huge blow to the plans many contractors had to close down a company without perhaps retiring for good.

 

Other speculation

It’s more than likely that the Chancellor will continue with his focus on tax avoidance and clamping down on those who use marketed schemes to avoid paying their fair share.

 

Rumours are being leaked about Osborne reverting back to the old limit of 40p additional income tax rate band. It’s also unclear what the Chancellor will announce about pensions. While talk of major changes to the system of pension tax relief is making its way around the rumour mill, it seems more likely that there will be a reduction in benefits currently enjoyed by savers. If this proves true on Wednesday then now doesn’t seem like the right time to further reform pensions.

 

48 hours to go

With the Budget less than 48 hours away, the speculation will keep going round until the Red Box is opened in the House of Commons. We will be watching with interest and unpicking exactly what Osborne’s announcements mean for contractors. Make sure you’re in the know. Keep an eye out for our Budget special blog.


In the meantime, download our 2015/16 tax yearend ebrief to ensure you’re making the most of your money before 5 April.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Dividend changes are coming…..be prepared!

Dividend changes are coming

For Limited Company contractors, it’s all change with dividends come April 6. The need to gross up a dividend will be withdrawn, meaning the amount you receive is the amount you will be taxed on. Your dividends will instead be subject to a new dividend tax.

 

But what is this tax and how will it affect you?

In this blog our Director of Accounting and Tax, Janna Beeching takes a deeper look into what’s to come and more importantly, what you can do before April 6 to minimise the impact on you and your business.

 

The new dividend tax

The first £5,000 of dividends will be taxed at a nil rate, and will therefore be tax free. Subsequent dividends will be taxed at 7.5% where they are within the basic rate tax band, 32.5% for those in the higher rate band and 38.1% for those in the additional rate band.

 

The new rules will increase the amount of tax payable above the nil rate compared with 2015/16, but there are opportunities to mitigate this.

 

Dividend paperwork

A dividend can be challenged by HMRC if the proper paperwork is not in place. This could mean that a dividend is treated as salary or loan. The paperwork is very simple and consists of a Director’s Resolution and a dividend voucher. Templates should be easily obtainable from your accountant.

 

Director’s loans (current account)

If you are owed money from your company it may be better to take a repayment from the company rather than dividends that are taxable at higher rates of income tax. But, for 2016/2017, the new dividend tax rules (above) means that you should consider this carefully.

If your loan remains outstanding more than nine months after the end of the company’s accounting period you will incur a tax charge. Taking loans should be carefully managed to avoid unnecessary or unforeseen tax liabilities.

Post 6 April 2016, loans are likely to become more frequently part of your income planning. Talk to your accountant to understand why.

 

So what should you do now to prepare?

Consider dividends before 6 April 2016. Careful planning now to make use of the allowances and basic rate band will maximise the dividends that can be paid before 6 April. This might offer the opportunity to accelerate a dividend before the new tax comes into effect.

 

What all contractors should be doing is looking at how their company is structured and whether or not there are missed opportunities to have different classes of shares or additional shareholders to minimise the tax you pay.

 

Your accountant can discuss these matters with you. Here at Intouch we offer a personal assessment to identify whether opportunities exists for you. We offer services for clients and non-clients so please contact us for more information and a fixed price.

 

For a more comprehensive understanding of what’s to come for dividends, download our free ebrief: Changes to dividends: what do they mean for you?

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

10 facts contractors need to know from today’s Finance Bill

The Finance Bill 2016 – why it’s good news for genuine PSC contractors…bad news for Umbrella workers, their clients and agencies.

Are you a contractor worried about changes to tax relief on travel and subsistence (T&S)? Concerned that you will lose out financially? The Autumn Statement announced that changes were on the way that could affect contractors/ freelancers. Today we’ve found out more and share what the changes in the law mean for Umbrella and personal service company (PSC) contractors.

 

Intouch is at the forefront of tax for contractors and Managing Director Paul Gough, with over 30 years experience in accounting and tax, has completed an initial analysis find out what the draft Finance Bill means to you.

In summary

PSCs who are truly independent and are not “disguised employees” (outside IR35) can still claim tax relief on T&S after April 2016.

 

This will not be the case for many Umbrella workers.

The relevant detail

Today’s publication of the draft Finance Bill 2016 sets out the detailed legislation and now makes these changes clearer:

  • If you are currently an Umbrella worker under the (or right of) supervision, direction or control (SDC) of the client or any party related to them then you cannot claim tax relief on T&S expenses from April 2016.
  • You are automatically deemed to be subject to SDC by HMRC; the Umbrella must determine otherwise with the help of the client.
  • Clients and agencies will have to provide information to help Umbrellas decide on the existence of SDC.
  • The only exception is where all services are conducted at the client’s home (domestic workers for instance).
  • If your employer (the Umbrella) gets this decision wrong then the Umbrella or its directors may have to pay any underpaid tax.
  • If your Umbrella does not pay the tax or the client or agency provide poor information they too may be on the line.
  • If you are an Umbrella worker not under SDC then you can claim T&S relief after 6 April 2016 (but not at source) unless new untested models work when wages are paid.
  • If you are a PSC (Limited Company contractor) and are outside of IR35 then it’s business as usual.
  • PSC contractors can claim T&S relief on travel to the client, and where they are outside of IR35.
  • If you are outside of IR35 then the SDC test is not applied – happy days!

 

HMRC has listened to stakeholders have made it clear with this draft legislation that PSC contractors working outside IR35 are indeed “self employed” and not the same as Umbrella workers.

 

They do enjoy different risks and rewards and as a consequence can claim tax relief for T&S costs.

 

So this is good news for anyone already running their own Limited Company or thinking about going Limited. For any Umbrella workers, it’s a good idea to start asking questions and consider your options so you aren’t forced into unwanted working practices come April 2016. In our next blog we’ll unpick what the Finance Bill 2016 means for contractors and give you ideas on actions you should consider.

 

Does today’s Finance Bill leave you more confident in contracting, or are you a worried Umbrella worker? Share with us how today’s announcements will affect you.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

How often can a Limited Company director draw dividends?

Drawing Dividends

Contractors are increasingly turning to forming their own Limited Companies rather than operating as sole traders or under Umbrella companies. This is in part due to the tax efficiencies available as well as the additional security it offers.

 

Why go Limited?

Whilst the ‘sole trader vs Umbrella company vs Limited Company’ debate is one which has been going on for quite some time and will continue to do so, the bottom line is that for many contractors, going Limited is the best approach. Why? Just a few advantages include:

  • Higher take-home pay
  • The ability to claim on a wider range of expenses
  • Flat Rate VAT Scheme entitlement
  • Security of personal assets
  • Greater control (when compared to using an Umbrella Company)
  • Better credibility
  • Greater tax planning opportunities

 

How do you pay yourself?

As a sole trader, the business’s money and the contractor’s personal money are one and the same. However, once a Limited Company is formed, these become separate entities and the money of the company and the contractor are separate, providing additional financial security.

 

In order for the contractor to ‘pay’ themselves as tax efficiently as possible, it is generally the case that they are paid a mixture of salary and dividends (depending on their circumstances and IR35 status), both of which should always be discussed with an accountant.

 

For those unaware, dividends are payments made to the owners of the company, ‘the shareholders’, from the company profit. Company profit is not only income less expenses for the current year, but also takes into account the Corporation Tax that will be due. It also includes any retained profits or losses brought forward from prior years. In some respects, dividends can be complex, however as a general rule, so long as the company has the money to be able to make the dividend payment and cover any tax and VAT due, there won’t be any issues.

 

One question which many contractors ask time and time again, however is:

 

How often can you draw dividends?

There are two types of dividend – Interim and Final. Interim dividends are those paid throughout the year, with Final dividends paid once annual accounts have been completed. Within a small company, the accounts are rarely complex, which means Interim dividends can be paid throughout the financial year. It is worth noting here that dividends are received on the date they are declared and, as such, it is important to consider the declaration date when declaring dividends close to the end of the tax year, as it can be an incredibly useful tax planning tool.

 

To answer the question asked however, it is important to understand that the frequency with which dividends are declared is much less important than whether they are legal or not. An illegal dividend, as outlined in The Companies Act 2006, Section 830, states that, ‘a company may only make a distribution out of profits available for the purpose’.

 

This simply means, that as long as a company is in a position to cover the dividend as well as their tax liabilities, the dividend can be legally declared. If declaring the dividend would result in the inability to satisfy tax and VAT obligations, it would be illegal and may result in repayment demands from shareholders (the contractor).

 

For many contractors, drawing a regular dividend is a sound way of financial planning; ensuring that your earnings are as tax efficient as possible and that a regular income is received. So long as the dividend is legal, the frequency at which they are drawn is down to the individual contractor’s discretion; something which is great news to contractors worrying that a dividend could perhaps only be taken at the end of a financial year.

 

For further advice on drawing dividends from a Limited Company, why not see our full guide, or for full financial planning support, give us a call today on 01202 375 562 to discuss how Intouch Accounting’s team of expert Contractor Accountants could help you make the most of your Limited Company.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Changes to dividends – how will you be affected?

Changes to dividends

Announcements made in the Summer Budget mean that April 2016 will be an important period of change for Limited Company contractors. The current Dividend Tax Credit will be replaced with the new Tax-free Dividend Allowance and the headline rates of dividend tax are also changing. If you currently receive dividend payments or are considering doing so in the future, then you will be affected.

 

How should you prepare for these changes?

In our latest ebrief: Changes to dividends: what do they mean for you we explore:

  • what is a dividend?
  • the new dividend allowance
  • how dividends will be taxed
  • if pensions and ISAs will be affected
  • what your options are when taking dividends before and after April 2016
  • why these changes are happening

 

Knowing what’s just around the corner and how to prepare for it can ensure you’re in the best position come April 2016. Make sure you fully understand how these changes will affect you by downloading our latest ebrief.

 

Make the most of your dividends, be clear on where you stand.

 

When it comes to understanding the changes surrounding dividends, it’s wise to seek guidance and expertise from a contractor accountancy. Call us on 01202 375 562 to speak to one of our advisers now about the unlimited support our clients receive when new HMRC changes are announced and beyond!

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Summer Budget 2015: Changes to Dividend Taxation

2015 Budget aftermath: A look at what the dividend tax change means for contractors

Across the country, contractors are still reeling after the changes announced in the Summer 2015 Budget (see our full Summer Budget review here). In particular, the community has been awash with speculation and concern regarding the Government’s pledge to introduce a new taxation system for dividends taken from companies.

Under the current regime, there is a 10% tax rate for dividends but this is cancelled out by a 10% tax credit, meaning basic rate taxpayers receive dividend income tax-free. According to our man with a plan, Chancellor George Osborne, this system is “Arcane” and “Complex.”

The result of this thinking has been an overhaul of the current dividend tax system, with a new – and supposedly simpler – £5,000 tax-free dividend coming into play from April 2016. So far, so good you might say. However, with the introduction of this new limit comes the creation of three new dividend tax bands, which will apply to all dividend income in excess of £5,000 per year, as follows:

  • 7.5% (basic rate)
  • 32.5% (higher rate)
  • 38.1% (additional rate)

 

So what can you do about it? Well the first step is to make sure you understand the changes and what they mean for you and your business model. Let’s take a look.

Does it affect you?

The majority (around 85%) of UK taxpayers will, in fact, be safe from the changes thanks to the £5,000 tax free allowance. At normal rates of dividend yields, you would need to own £140,000 worth of shares before you hit that £5,000 sweet spot and the new dividend tax kicks in.

I predict the most affected community will be the middle income entrepreneurs. This will include freelancers and contractors trading through their own Limited Company (see our post on the advantages of contracting through a Limited Company), as well as any family owned businesses that have previously used dividends to reward shareholders, who may or may not also be employees.

The Government appears set on removing the incentive for incorporations that are motivated primarily to allow freelancers and contractors to save National Insurance by setting up as their own boss. It seems an interesting coincidence that the new 7.5% dividends tax works out at the same amount (roughly) as a basic rate taxpayer would save on National Insurance using dividends.

But this is a short-sighted strategy, for it is unlikely to deter people who should have been operating as a Personal Service Company (PSC) in the first place. Instead, it will add an extra tax burden to small and medium sized entities, which create jobs and wealth for UK plc.

I expect it will deter tax motivated incorporations for the vulnerable and lower paid contractors. However, is the likely additional ‘tax take’ from those individuals really worth the political criticism from attacking entrepreneurs?

“How can the Government get away with it?” you may ask. Well, the Chancellor has used smoke and mirrors to distract the business community with talk of a longer-term aim to allow further reductions in the rate of corporation tax. I’m afraid I don’t buy it. To me, this feels like a tax raid upon small and medium sized enterprises (SMEs), micro and nano businesses set up by entrepreneurs in the UK.

How will the changes affect your income?

For contractors and freelancers who earn up to the basic rate ceiling and take a salary of £8,000 and £31,000 dividends, their tax bill will rise by around £2,000.

While this is not an insignificant sum to be taken lightly, the reality could be that the impact is still less damaging than the sacrifice of other perks if a contractor returned to PAYE status. To me, the advantages of contracting – both in the immediate and long term, such as planning for retirement and pension funding – far outweigh the initial financial hit of this dividend tax change.

So as you can see, this is not just an issue for the contracting elite. It affects any business where the owners are also employees. For this reason, I believe this latest raft of changes is an attack on all small family and close company businesses, not just one man band contractors.

If you are unsure about how the changes will affect your income, it would be wise to speak to your accountant sooner rather than later. 

Remember the benefits of going solo

Contractors considering jumping ship and heading back into permanent employment would be well-advised not to make a hasty decision they may later regret.

At times like this, it can be tempting to start reviewing your business structure or how your company directors are paid. But my advice is this; Keep calm, and talk to an accountant.

In the same way share valuations can go up and down, taxes tend to ebb and flow with the political agenda. It is therefore crucial not to panic and make knee jerk reactions without first doing the sums and remembering the reasons why you went solo in the first place.

There are still benefits to be had by keeping your business model simple, remaining as your own boss and weathering the changes. It might turn out to be just a storm in a teacup.

What should you do next?

If you don’t already have a contractor accountant, now would be a good time to appoint one. I assume most advisers will be very busy in the run up to 5 April 2016, working out if large dividends should be paid before the rules change, along with which family members should be added to the share register.

The contractor landscape can be daunting enough as it is, so why not give us a call on 01202 375491 and let our team of expert contractor accountants guide you through the choppy waters left in the wake of this Summer’s budget?

In the meantime, watch out for more discussion on this issue over the coming weeks on the Intouch Accounting blog. To subscribe, simply fill in your details below so you can receive the latest industry advice, comment and analysis direct to your inbox.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.