North East company directors could be facing substantial hikes in their tax bills next year if they don’t respond to forthcoming Government rules changes around the way in which they can draw income from their firms.Measures announced in the Chancellor’s summer Budget will see major changes to the rules around dividend payments coming into force in April 2016, including the abolition of the ten per cent tax credit that is currently applied to the net dividend paid.
This tax credit currently makes such dividends the most tax efficient way for most company owners to draw an income from their businesses, rather than drawing a traditional salary than attracts a higher rate of income tax.
And Rachel Warriner, corporate tax manager at Gosforth-based RMT Accountants & Business Advisors, is recommending that business owners treat the forthcoming changes as a good reason to review their remuneration strategies.
Dividends are drawn from a company’s ‘distributable reserves,’ which are comprised of current operating profits and money in the bank from previous years.
As things stand, company shareholders who are basic rate tax payers when taking into account all their income pay no additional tax on the dividends they take. Higher rate taxpayers pay additional tax of 25% of the net dividend taken, while additional rate taxpayers pay 30.56%.
Under the new rules, which will remain in place for at least the lifetime of the present Government, the ten per cent dividend tax credit will be abolished, which removes the need for dividends to be grossed up in personal tax computations.
Basic rate tax payers will face a 7.5 per cent tax rate on the dividends they take, with higher rate taxpayers paying 32.5% and additional rate taxpayers pay 38.1%.
A new £5,000 dividend allowance will also be introduced, regardless of income level, meaning that the first £5,000 of dividend income will have a zero rate of tax. The personal allowance can also be used against dividend income.
Rachel Warriner says: “These changes represent a major tax increase for the owners of North East SMEs, especially those who are currently drawing a tax efficient mix of dividends and salary up to the level of the basic tax band, and for many of them who’ve battled to keep their businesses afloat during the recession, they’ll be especially unwelcome.
“There’s no definitive answer as to whether company directors would be better to stick with taking dividends next year or return to a salary-based income, and each person’s individual circumstances should be properly reviewed before any decision is taken on what to do.
“If the distributable reserves are available, there may be a case for directors taking higher than usual dividends during this financial year, which would be payable at the current lower rate, and there are likely to be other tax planning opportunities available which could mitigate to a degree the changes to the dividends regime.
“Taking proactive action now on their remuneration strategies should be high on the To Do list of North East company owners, with a view to having updated plans in place well before the new rules kick in.”
RMT provides the full range of financial and business advisory services through its Corporate Finance, Recovery & Insolvency, Medical and Specialist Tax divisions. For more information, please visit www.r-m-t.co.uk