Dividends and salary: getting the balance right

If you’re considering setting up your own contracting firm by trading under a Limited Company, then taking a mix of salary and dividends is the most tax-efficient way to take income from the business.

Due to the implications associated with drawing a £Nil salary, many contractors choose to pay themselves a modest salary, topped up with dividends.

For instance, you could pay yourself a basic salary up to the limit of when NI contributions become payable – the threshold for the current 2018/19 tax year is £8,424. Yet, while it’s your decision to do this, remuneration at the NI threshold is lower than the National Minimum Wage.

As of 1 April this year, the National Minimum Wage for people aged 25 and up is £7.83 per hour which, when full-time hours are considered, works out at approximately £14,250 per year. Taking a salary at this level may be a better alternative to taking one below the NI threshold, as it will demonstrate your intention to operate a genuine commercial, contracting business. There is no advantage to withdrawing a salary in excess of this figure however, except in ‘special’ circumstances.

 

Drawing a £Nil salary

So, you may be wondering: Can I take all my income as dividends and not pay myself a salary? The short answer is yes, you can; however, doing this has a number of implications you need to be aware of. These include:

 

The effect on future entitlements

Paying yourself a £Nil salary will mean you do not pay any National Insurance. However, not paying NI contributions could affect your entitlements later down the line, including the state pension and a number of other state benefits.

 

Investigations by HMRC

If you’re not taking any salary from your business, it’s possible that HMRC will argue that the dividends paid or declared incorrectly are in fact ‘salary in disguise.’ In this case, HMRC will seek to tax the dividends as salary.

 

Corporation Tax Relief

Any salary that your company pays to you will qualify for Corporation Tax relief. This means that if your company pays you £8,424 it will save £1,600 in Corporation Tax.

This combined with the fact that this income is tax free for you, as it’s within your personal allowance, makes a nominal salary very tax efficient.

 

Finding a balance that’s right for you

Of course, striking the right salary/dividend formula will be entirely dependent on your individual circumstances – there isn’t a one-size-fits-all solution. Many factors will need to be considered, such as:

  • Your age
  • Likely length of career
  • Projected income levels
  • Views of pensions planning and saving
  • Family status
  • Income from outside the business
  • IR35 risk status
  • Cash requirements to fund lifestyle

 

With all these factors to bear in mind, it can really help to turn to the professionals to help in your decision, like the team here at Intouch. We’ll help you get your business up and running and can advise on how best to withdraw income from your company. If you’d like to find out more, call our experts on 01202 375293. And, in the meantime, take a look at our new guide on combining salary with dividends.

 

 

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.

Demystifying dividends: a beginner’s guide

For many full-time contractors, the opportunity to earn a higher salary is among their main reasons for making the move. That, along with the freedom and enjoyment that comes with owning their own business.

If you’ve decided to set up your own Limited Company, you want to be certain it’s created in the most tax efficient way. After all, you’ll be working incredibly hard for your money, so you don’t want any more going to the tax man than has to.

Dividends are a great way to maximise the income you take from your business. If you’re not too sure of what they are, here’s an introduction:

 

In a nutshell…

Dividends are essentially a method of taking income from your business. They are payments made to the company’s owners – aka its shareholders – from accumulated profits, after business-related payments such as Corporation Tax and VAT have been made.

The main rule for withdrawing dividends is that your company must have enough ‘retained profit’ in the bank to cover them. Withdrawing dividends from untaxed earnings is illegal and, if caught, you could land yourself in serious hot water with HMRC.

Any profit that remains once you’ve withdrawn the dividends can stay in the account, where the money will hopefully accumulate over time.

 

What are the advantages?

The main benefit of drawing dividends from your Limited Company is that you won’t have to pay National Insurance Contributions (NICs), regardless of your Corporate Tax or Personal Income Tax rates. That’s why many business owners choose to pay themselves a modest salary, topped up with dividends.

 

Are there any disadvantages?

The only real drawback to dividends is that there must be profit in the business in order to declare them. If it’s not turning a profit, you’re still able to pay yourself a salary or bonus, even if it means you declare a loss – a situation you hopefully won’t find yourself in.

Taking dividends is something that must be decided on by every company shareholder, which could cause issues if there were multiple shareholders or an outside investor. Yet, these cases are unlikely to apply to you.

 

Who can dividends be paid to?

Dividends are separate to bonuses and salaries and can only be paid to the shareholders in the business. Many contractors will name a spouse as their shareholder, with dividends split depending on how much share capital each person owns. This can lead to even greater tax efficiency.

 

How are dividends taxed?

Dividends are taxed as personal income. The first £2,000 of dividend income is free of tax under the dividend allowance, with further dividends taxed at the following rates:

Within the basic rate threshold (income between £8,425 and £46,350 for 2018/19) = 7.5%

Within the higher rate (income from £46,351 to £150,000 for 2018/19) = 32.5%

At the additional rate (income exceeding £150,000 for 2018/19) = 38.1%

 

Find out more

Now you’ve got a clearer idea of what dividends are, there are rules to be aware of when it comes to declaring and balancing them with your salary. We thought it would be useful to put together a guide on combining salary with dividends for people making the move into contracting.

If you feel like you might need a helping hand setting up your business, the team at Intouch can help there, too. We’ll pair you up with your own expert Personal Accountant, who will help with everything from incorporating your company with HMRC, to setting up a business bank account, to insuring your company. Make the first step by calling our team today on 01202 375293.

 

 

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 taxed?

Dividends can sometimes be difficult to understand and many contractors find themselves wondering when they should take them and when they actually get taxed? In this blog we answer these two questions and cover 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?

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 2018, that was ‘payable’ on 7 April 2018, is included as income for the 2018/19 tax year regardless of when it is actually paid.

Remember! Should HMRC decide to investigate, in order to support all dividends, you should keep copies of all dividend vouchers and minutes. Your contractor accountant should have a dividend template for you to use, then you can 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 2018, the dividend allowance is £2,000. This applies for 2018/19. It’s worth taking at least £2,000 in dividends, as this amount is tax free, regardless of which tax band you fall into. Your contractor accountant will be able to review the level of dividend allowance available and amend this as necessary.

 

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 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.

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 2017, that was payable on 7 April 2017, is included as income for the 2017/18 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 2016, the new £5,000 dividend allowance was introduced and still applies for 2017/18. It’s worth taking at least £5,000 in dividends, as this amount is tax free, regardless of which tax band you fall into. We will review the level of dividend allowance available and amend this as necessary. 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.

‘Stable Brexit platform for a global Britain’ as Spreadsheet Phil delivers last Spring Budget

The Spring Budget 2017

 

Chancellor Hammond or “Spreadsheet Phil” as the Treasury call him, quietly delivered his 2017 Spring Budget today with a spring in his step and mischief in his face as he taunted the Labour benches opposite. He reminded me of a latter day Robin Hood, taking a little from the rich and giving a little to the poor(er) members of society. Not a bad ideal you may think, but does his tinkering go far enough?

 

I prefer him imitating Robin Hood rather than being the Sheriff who would take taxes from the vulnerable for selfish gain. In this Spring’s Budget nasty surprises were noticeably absent as Mr Hammond basked in the reflected glory of improved economic growth numbers recently published by the Office of National Statistics.

 

No doubt weaker sterling has resulted in inflationary pressures and, to protect living standards, more pounds are required in the pockets of UK citizens. Hammond believes his Budget addresses this balance but that view is not shared by the leader of the Opposition.

 

A cautious Budget; it boasts of fairness and to “levelling the playing field”, specifically with reference to National Insurance contributions from the self-employed rising closer to those of the employed. The Government’s strategy of closing the tax gap (the difference between the taxes that should be collected and those which actually are) seems to be working. A continued hard line on all forms of tax evasion and avoidance, with stronger compliance tools to police best practice, is hard to criticise.

 

Faced with ongoing criticism on the timetable and a paucity of clarity surrounding the introduction of the public sector off-payroll (IR35) changes in 4 weeks’ time, it was good to hear that the implementation of Making Tax Digital for some smaller businesses has been relaxed. Nevertheless the public sector changes are still expected to result in procedural and contractual chaos and HMRC’s digital status assessment tool ‘ESS’ will need a thick skin.

 

Flexible workers, contractors and freelancers who comprise the ‘gig economy’ feel with some justification that they have been ambushed again with reductions in the dividend allowance, Flat Rate VAT changes penalising ‘low cost traders’ and public sector IR35 reforms, all of which are causing chaos and extra cost in the temporary worker supply chain. There is no doubt that the taxation differences between the employed and the “self-employed” (including single director companies) require harmonisation, but any changes necessary to bring tax treatment in line with new economy ways of working must be explored and considered thoroughly and not as a knee jerk response to abuse by an unscrupulous few. Flexible workers may feel bruised but if the Sheriff had written the script then far more radical changes can be imagined.

 

Consistent pleas for patience and reflection from stakeholders have fallen on deaf ears and many commentators believe that the outcome is unlikely to deliver the returns that HMRC expects. I do hope that in balancing his books and sharing the wealth around Robin has not prematurely spent the money from the flexible workforce. Otherwise I think the job of collecting it will go back to the less amiable Sheriff and then it will be goodbye to fairness and simplicity.

 

Call me old fashioned, but I doubt next Autumn’s Budget will be quite so Robin Hood-ish.

 

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.

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 ratesRates from 6 April 2016
Nil Rate0%0%
Falling within basic rate0%7.5%
Falling within higher rate25%32.5%
Remainder30.5%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.

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.