With the end of the tax year fast approaching, many will be turning their attention to pre year-end tax planning. This April sees a number of tax changes which makes planning more important than ever. My colleague, Gary Heynes, wrote in last month’s tax voice about action to be taken in respect of pensions. You may also want to ensure you have contributed the maximum to your ISA and utilised your reliefs and allowances for the year.
However, one of the most significant changes will be the taxation of dividends from 6 April 2016: the detail of the changes has been covered before by my colleague, Stuart Robb, in the August 2015 edition of tax voice and by me in the September 2015 edition. For most company owner-managers, dividends will continue to be more cost effective than a higher salary or bonus post 5 April 2016. However, dividends will be more expensive in tax terms from 6 April than in the current tax year. Therefore, all owner-managers should be considering whether to take a larger dividend before 6 April 2016.
The tax impact
A dividend of £50,000 taken before 6 April 2016 will cost £12,500 in tax for a higher rate taxpayer and £15,278 for an additional rate taxpayer. After 6 April 2016, a £50,000 dividend will incur a tax liability of £14,625 for a higher rate taxpayer and of £17,145 for an additional rate taxpayer. In both cases, this assumes that the first £5,000 of this post 5 April 2016 dividend is tax free; ie you have no other dividend income. As this ’tax free’ dividend allowance forms part of your basic rate band, it could mean you will pay more tax on other income which is ‘pushed’ into the higher or additional rate tax bands.
The company needs to have sufficient reserves to be able to declare a dividend pre 6 April and each shareholder may be in a slightly different tax position: dividend has to be taken by all holders of the same class of share unless one or more shareholders formally waive their entitlement to the dividend before it is declared. Paying a dividend before 6 April will also accelerate by a year the date on which the tax is payable: if paid pre 6 April 2016, the tax will be due by 31 January 2017; if the dividend is paid after 5 April 2016, the tax will not be due until 31 January 2018. Consideration also needs to be given to the effect on tax payments on account for 2015/16 (and 2016/17) of paying a dividend pre year-end. While there is no requirement to increase payments on account if income is higher in 2015/16 than in 2014/15, if a claim to reduce 2015/16 payments on account has been made already (perhaps when you filed your 2014/15 tax return), you will need to go back and review that claim to reduce in light of the pre 6 April 2016 dividend.
It should go without saying that whenever your company pays you a dividend, you need to keep enough money aside to pay the tax thereon. The tax liability on the dividend is yours, not the company’s, and, unlike PAYE, the company does not withhold tax on a dividend before paying it to the shareholder. If the company pays the tax on the dividend for you, that can bring a whole host of tax issues for both the company and the shareholder.
For more information please get in touch with Karen Clark or your usual RSM contact.