As 5 April approaches, don’t forget those last few bits of pre-year-end tax planning - for example, maximise your pension contributions, make sure you have used your ISA allowance and other reliefs and allowances such as the CGT annual exemption, and try to avoid the effective tax rate of 60% on income between £100,000 and £121,200 by making a pension contribution or gift aid donation.
However, one of the most significant changes from 6 April 2016 will be to the taxation of dividends. 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 the post-6 April 2016 dividend is tax-free, i.e. you have no other dividend income. As this ‘tax-free’ dividend allowance forms part of your basic-rate band, it could mean that you will pay more tax on other income which is ‘pushed’ into the higher- or additional-rate tax bands. Outside shareholders may not have much say in when a dividend is voted, but owner-managers of companies should certainly consider whether to take a larger dividend before 6 April 2016.
Paying a dividend before 6 April 2016 will accelerate by a year the date on which the tax is payable and consideration also needs to be given to the effect on payments on account for 2015/16 (and 2016/17) of paying a dividend pre-year-end, especially if a claim to reduce 2015/16 payments on account has already been made.
However, following the recent Budget changes to CGT rates, most investors would be wise to wait to sell assets (other than residential property or carried interest) until after 6 April 2016. But don’t forget that the Stamp Duty Land Tax changes come in on 1 April 2016, not 6 April 2016, so time is short to complete the purchase of a second or subsequent property which is not replacing your main residence.
If you would like any more information on this issue please contact Karen Clark, or your usual RSM contact.