Summer Budget 2015 – New tax regime for dividends

One of the major changes from the Summer Budget is that the taxation of dividends will be reformed from 6 April 2016.

The 10% dividend tax credit is abolished and, in its place, individuals will have a £5,000 dividend tax allowance. An individual will pay no income tax on dividend income received up to that amount. However, dividend receipts in excess of £5,000 will be taxed at:

  • 7.5% for basic rate taxpayers (previously 0%)
  • 32.5% for higher rate taxpayers (previously 25%)
  • 38.1% for additional rate taxpayers (previous 30.56%)

The new dividend allowance will represent a significant tax increase for owners of small companies who have been able to extract profits from their business with a tax-efficient mixture of salary and dividends.

Example

In 2015/16, Alan takes a dividend of £27,000 net (£30,000 gross) from his personal company. His only other income is salary equivalent to his personal allowance. He pays no income tax on this combination of salary and dividend because it’s all covered by his personal allowance and basic rate band.

In 2016/17, Alan takes a dividend of £27,000 (gross, no tax credit) from his company and a salary equal to his personal allowance. He pays tax at 7.5% on £22,000 of that dividend after deducting the dividend tax allowance of £5,000. In 2016/17 he will pay income tax of £1,650 on the dividend.

The ‘tax lock’ prevents the Chancellor from raising the rate of income tax. The tax rise illustrated above is achieved by reducing the rate of tax on dividends from 10% to 7.5% while simultaneously removing the tax credit that balanced the 10% tax charge.

Some initial reactions from commentators were that people would switch back to paying salary instead of taking dividends. However, we ran calculations for different levels of Income Tax and NIC and it is still beneficial to take a dividend rather than salary, although the saving has been reduced. The saving is still particularly pronounced for a dividend if employee’s NIC would be payable on any salary at 12%, rather than at the 2% rate.

We are also exploring other options for profit extraction such as charging interest on credit balances on directors’ loan accounts and employer pension contributions. There can be a requirement to deduct 20% tax at source on interest payments by the company. Tax relief on pension contributions in respect of higher income individuals is to be restricted, but with the new pension freedom rules, pension contributions are more popular than they have been for some time.

When we prepare tax returns for clients for the year ended 5 April 2015, we will discuss the additional tax that they would have had to pay if the level of any dividends received had been taxed at the rates applicable from 6 April 2016. This will give them a good guide based on their own income profile in regards to how the increase in income tax payable on dividends is likely to affect our clients from 2016-17, if they decide to keep the same income profile going forward.

The effect of this tax hike is likely to be felt at 31 January 2018 when the self-assessment balancing payment for 2016/17 will be due for payment.

Depending on individual circumstances and future income needs, some clients may decide to stockpile a certain level of dividend income before the end of this current tax year ending 5 April 2016, in advance of the increase in the effective rate of tax payable on dividends. This will typically only be beneficial if a certain level of dividend income is already taxed at the current effective higher and additional rates of 25% and 30.56% respectively.

In summary, taking a higher salary is still not likely to be beneficial in tax terms under the proposed tax regime. The low salary with the balance of income requires being taken by dividend is still the cheapest option, however the overall Income Tax and National Insurance contributions savings will not be as great as they have been once the new rules are introduced.

Please feel free to discuss the effect of these changes with your usual contact at Tait Walker.

Summer Budget 2015 – tax changes

s465_Budgetdoc04

Our Tax Associate, Chris Hodgson shares his thoughts on the tax changes announced in yesterday’s Budget…

In the first majority Conservative Budget since November 1996, George Osborne set out his stall on the direction of travel for taxation and welfare over this Parliament. There are a large number of changes, many of which are inter-related.

The Tax Lock will mean that in addition to VAT, rates of Income Tax and National Insurance will not change during this Parliament. However, the amount of income that you have to earn before paying 40% tax is to increase by about £600 for 2016/17. On the other hand, the amount of NIC payable will increase and so the net effect is a saving of about £5 per month.

The introduction of the National Living Wage and the increase in personal allowance will increase the net pay for a low income family, but the reduction in tax credits will offset against that extra income.

This places a greater financial burden on employers who will be paying the National Living Wage. To try to help those companies the Employment Allowance, which subsidies the cost of employer’s NIC, is to increase by £1,000 per annum. In addition, the rate of corporation tax is to fall from 20% to 18% by the end of this Parliament.

The Chancellor mentioned several times that this is to be a One Nation government and there was further evidence of those with the broadest shoulders being asked to bear a large proportion of the financial pain. Pension tax relief for 45% of taxpayers is to be restricted, loan interest relief for buy to let landlords is to be limited and the additional nil rate band for Inheritance Tax will not benefit those with estates worth more than £2.7 million.

Families receiving tax credits who are already paid more than the proposed National Living Wage will also suffer from this Budget, as the loss of tax credits is likely to exceed any benefit from the increase in personal allowance.

Overall, this is a more balanced Budget than might have been expected and it gives an indication that the government may be trying to benefit the whole nation.

For further advice regarding the tax announcements in yesterday’s Budget, please contact Chris Hodgson on 0191 285 0321 or email chris.hodgson@taitwalker.co.uk

July Budget – what does it mean for employees?

Today’s Budget saw some good news for employees with an increase in the tax-free personal allowance, as well as an increase in the higher rate income tax threshold.

In a change from predictions, the Chancellor did not mention salary sacrifice. However, it has been stated that those earning £150,000 will have their annual tax-free pension allowance tapered from the current limit of £40,000 per year to a minimum of £10,000. This impacts significantly on retirement and tax planning and further highlights the need for comprehensive financial planning.

In addition, dividend tax credits have been replaced with a tax-free allowance of £5,000 for all taxpayers. This is good news for Pension & ISA savers as their funds remain exempt from the changes and will remain tax-free.

From 2017 there will be an additional £175,000 inheritance tax allowance for properties on top of the current £325,000 standard allowance, supporting those who wish to leave their homes to their children and grandchildren. This relief will taper for those with estates of more than £2m, so now is the perfect time to consider Inheritance Tax Planning.

 

Tait Walker Wealth Management is a trading style of Tait Walker Financial Services Limited which is authorised & regulated by the Financial Conduct Authority.

Summer Budget – A reaction from the North East

Andrew-Moorby

Andrew Moorby, managing partner at Tait Walker

The scope of the changes planned for the coming years is so wide reaching that at this stage it’s difficult to assess who the winners and losers are.

That said, the Budget was distinctly lacklustre when it came to the issues pressing to the North East. Any discussion of the Chancellor’s “Northern Powerhouse” was short of mentions for our region, whilst Yorkshire and Lancashire featured heavily. I have real concerns that our influence as a key player in the UK’s economy is being overlooked and that we are being left behind.

With the interaction of Corporation Tax changes, wage increases, income tax, dividend taxation and welfare cuts, it will be difficult for SMEs and other businesses to assess the impact on them and their employees until everything is in force.

Most changes are set for next year and beyond, therefore giving the region and businesses time to assess and plan for what will undoubtedly mean increased business costs and issues for employees at the lower end of the pay scale.

As a region we have high numbers of workers on benefits, so the cuts will be more keenly felt across the North East. If the government is able to pass welfare costs on to the employer with wage rises etc. then businesses need to plan for increased cost.

Mini Budget Predictions – the proposed inheritance tax (IHT) changes

Britain's Chancellor of the Exchequer Gordon Brown holds his briefcase as he leaves Downing Street to unveil his Budget in the House of Commons in London, March 17, 2004.   REUTERS/Stephen Hird

Our Tax Associate, Chris Hodgson shares his predictions ahead of tomorrow’s Mini Budget….

Having been heavily featured in the media, the extra nil rate band for Inheritance Tax for homes is almost certain to be included in tomorrow’s emergency Budget.

It will also be interesting to see whether the second half of the proposed changes that were leaked in March (when there was a Coalition government) will be implemented. That proposal, which was to help to pay for the extra nil rate band, would see the nil rate bands of persons with more than £2 million of assets being tapered away. If these rules are implemented, there will be no nil rate band for those who have assets of more than £4 million.

Tapering away the nil rate band would make sense – to help hard working families whilst putting government finances back on track. However, to avoid heaping more tax on to people who might be seen as being the natural constituency of the Conservative Party, this part of the proposal may not be included in the Budget.

For tax advice, please contact Chris Hodgson on 0191 285 0321 or email chris.hodgson@taitwalker.co.uk

Energy Saving Opportunity Scheme (ESOS) – what you need to know

The Energy Saving Opportunity Scheme (ESOS) is the UK implementation of new EU legislation, requiring a mandatory programme of energy audits for “large enterprises”. This blog post will provide answers to some key questions about the new legislation.

Who does it apply to?

ESOS applies to any “large enterprise”, which is a business with more than 250 employees, a turnover exceeding 50m euros and a balance sheet exceeding 43m euros (these criteria should be met from 31st December, 2014).

It is also important to be aware that companies viewed as standalone SMEs can also be applicable if they are part of a UK or EU group containing other UK entities which are large.

What do you have to do to comply with ESOS?

You must perform an audit of 90% of total energy use for a one year period and identify/evaluate efficiency opportunities, informing the Environment Agency of these.

Your first energy audit must be conducted by 5th December,2015. The approximate cost to each business will be £6,600 over a four-year cycle.

You will also need to appoint a ‘Lead Energy Assessor’ – this person will need to be registered through an approved professional body.

What will happen if you do not undertake an ESOS assessment?

Failure to notify the Environment Agency of compliance will result in a penalty of up to £50,000 and/or an additional daily penalty of £500 for each day that your business remains non-compliant. These details may also be publicised.

Important points:

  • Plan ahead – there is a greater risk of penalty if you leave it until the last minute and it will also be more difficult to find and book in a lead assessor. Use your assessor early in the process to find out the best way to save time and money.
  • The penalty is final – failure to comply will result in the penalty as outlined above. You cannot simply pay a fine to void non-compliance.

For further advice regarding ESOS, please contact us on 0191 285 0321.

NECC Business Tips Book Released

NECC

As part of its 200th anniversary celebrations, the North East Chamber of Commerce (NECC) has worked with Activ Technology and Microsoft to compile and publish a book of their top 200 business tips.

With tips and insights in a wide range of business areas including leadership, strategy, recruitment, marketing, HR and finance, you can find some expert advice which may prove to be very useful for your business.

Click here to access the book.

Could you get caught out by the July Budget?

Our Head of Investment Services, Nick Swinhoe shares his thoughts on what the Chancellor may announce in regards to tax relief in his July Budget…

Financial commentators are expecting a change in respect of the tax relief available on pension contributions. The outcome could be a cut to the annual allowance in respect of pension contributions for the highest earning individuals (those who earn over £150,000 per annum).

In doing this, the chancellor would limit the level of tax relief available to those within that earnings band, thus saving the treasury millions, which could then be used to fund the other pre-election promises that he made.

In the past when similar changes have been made, anti-forestalling legislation has been used to close the window of opportunity between the budget and the proposed changes becoming law. It is unlikely that it will be different this time.

If you could be caught by this change you should consider making your annual pension contribution before 8th July rather than waiting until after the budget. Remember, you can also carry forward any unused allowances from the previous 3 years meaning that you could invest up to £180,000 and get tax relief of up to £81,000.

For further advice, please contact Nick Swinhoe on 0191 285 0321 or email nick.swinhoe@taitwalker.co.uk

 

 

This blog represents my interpretation of current and proposed legislation and HMRC practice as at the date of publication.  This may be subject to change in the future.  The purpose of this blog is to inform and should not be interpreted as a personal recommendation or advice.

Tait Walker Wealth Management is a trading style of Tait Walker Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority.

Mini Budget Predictions

Our Tax Associate, Chris Hodgson, give his predictions for the mini Budget on 8th July…

Due to the short timetable that was available to enact Budget announcements into a Finance Act prior to the election, a number of matters had to be set aside. Having now been re-elected, we can expect some of those matters to be reintroduced. Largely they were technical changes and so will not be grabbing headlines any time soon.

This Budget will give the Chancellor the chance to remind us of the promises made in the party’s manifesto and to look to introduce some of them now as a clear statement of intent for the next five years. There will be talk of the bill that will prohibit any increase in tax rates. This has the benefit of creating a feeling of stability but, in reality, if a Chancellor wants to increase taxes there are many ways to do so other than raising the rate of tax.

Welfare reforms

One of the main areas of content is likely to be in terms of proposed welfare reforms. In the run up to the election, the Conservative Party said that the reforms would produce savings of £12 billion, but there was no detail on the specific areas of reform. The mini Budget may be the platform for George Osborne to now give that detail.

Inheritance Tax

Another proposal is to introduce a new nil rate band for Inheritance Tax. Where the family home is to be passed to the children, this can allow a further amount of up to £350,000 to avoid Inheritance Tax, giving a tax saving of up to £140,000. The benefit of this saving will very much be felt in the South East.

The change is also to be focused so that the nil rate band will be gradually reduced, if a person’s estate is more than £2 million. We will only find out on Budget day if the proposals are to be introduced in their original form, but if so a person with an estate of at least £2.7 million will have to pay more Inheritance Tax than under the current regime.

Overall this Inheritance Tax change will reduce the tax take and to balance this tax reduction, the government is looking to restrict tax relief on pension contributions for persons earning over £150,000. We can all put up to £40,000 per annum into a pension, as that is the annual allowance. Under the proposals, where a person has income from all sources of more than £150,000, the annual allowance will be gradually tapered down to a minimum of £10,000 for any person with income of more than £210,000.

Where a business owner has the ability to control their income levels from year to year and they want to put money into pension, if the measure is introduced, an income level of just under £150,000 may be attractive.

Annual Investment Allowance

The final point which we would like to see in the Budget is a glaring omission from the March Budget. At that time George Osborne said that the level of the annual investment allowance, applicable from 1 January 2016, on which a business can claim a 100% deduction for plant and machinery, would be announced in due course. This announcement could be as late as December 2015, when the Autumn Statement is presented to the House of Commons.

Given the need for businesses to have forward plans for capital expenditure, forward knowledge of the tax position is vital. We are told that the country benefits from the government having a long term economic plan. It is to be hoped that the government will understand that forward visibility of the tax position will be of benefit to UK industry.

For further advice, please contact Chris Hodson on 0191 285 0321 or email chris.hodgson@taitwalker.co.uk

Directors’ responsibilities before and after insolvency

As company director, there are a number of duties that apply in your role during the normal course of the company conducting its business. These include the following:

  • Keeping accurate companies books and records including accounting records
  • Preparing and filing accounts or making returns to Companies House
  • Submitting tax returns and paying on a timely basis
  • Ensuring that you are not trading at a time when the company could be deemed to be insolvent
  • Ensuring that you are not trading at the expense of creditors

Your duties as a director must continue in the event of the company entering any form of insolvency procedure. Your integrity and conduct may be questioned if you fail to do so.

The following is a list of responsibilities which should not be taken as being exhaustive:-

  • In the period prior to the formal insolvency taking place, the Directors remain responsible for the Company and must continue to comply with all government and other statutory regulations.
  • Immediately prior to insolvency, any acquisition of assets of the company or any proposed transactions in which a director or party is connected may require disclosure to the board under the Companies Act 2006.
  • Following insolvency, the Directors may be required to identify any assets belonging to the company and may possibly be required to assist the “Official Receiver” (OR) or “Insolvency Practitioner” (IP) to dispose of and collect in assets. The Directors have an ongoing duty to cooperate and to provide information to the OR/IP.
  • There is an overriding obligation for directors to act in the best interests of creditors. Failure to do so may expose Directors to a claim for misfeasance or breach of duty.
  • If you are a Director of the company and the company enters liquidation you will be prohibited from using any name by which the company was known or similar names suggesting an association with the company. However, it is possible to use such a name if the correct procedure is followed.
  • Directors will be required to deliver a complete record of the company’s accounting records.
  • Directors should be aware that any personal guarantees given on behalf of the company may be called in.
  • You can act as a Director of another company unless you are disqualified from doing so.
    If you have misapplied or misappropriated company funds at the expense of creditors, this could result in disqualification proceedings being taken.

For further information regarding the director’s role during insolvency, please contact Lynn Marshall on 0191 285 0321 or email lynn.marshall@taitwalker.co.uk

Follow

Get every new post delivered to your Inbox.

Join 134 other followers