Don’t miss once in a lifetime opportunity to reduce your tax bill, says Anne Wilson, senior tax manager of the tax department at Pierce Chartered Accountants
Chancellor George Osborne’s July 2015 budget contained bad news for the many business owners who pay themselves a low wage, complemented by a dividend payment, in order to minimise their personal tax bill.
As of 5 April 2016, the rules are changing. The notional 10% tax credit on dividends will be abolished, and the rates at which dividends are taxed will increase.
Basic rate taxpayers currently pay no additional tax on their dividends, while higher-rate taxpayers pay tax equivalent to 25% of the net dividend and additional-rate taxpayers pay tax equivalent to 30.55% of the net dividend.
Window of opportunity
From April 2016, the first £5,000 of dividend income in each year will be tax-free, with sums above that taxed at 7.5% for people who pay tax at the basic rate.
Higher rate taxpayers will pay 32.5% and additional-rate taxpayers 38.1% per cent.
Although it will still be more tax efficient to draw a low salary and top up with dividend income, the benefits will not be as significant as at present.
That leaves a window of opportunity that is closing fast.
We will be discussing with our clients whether they should take the opportunity to accelerate their dividend payments to before the end of the current tax year. The dividend can be left on a loan account with the company and drawn down in future years. However it should be noted that this will also accelerate the tax liability on the dividend to 31 January 2017, so each client’s circumstances need to be considered.
As a rule of thumb it will be more beneficial to accelerate a dividend payment to before 5 April 2016.
Soften the blow
The truth is that most director-shareholders will be worse off as a result of this change. Business owners should draw as much as possible in dividends before the new rules take effect. Time is running out if you want to soften the blow.