As a shareholder of an owner managed company, it is likely you benefit from tax and NI efficient remuneration by drawing a low salary and then dividend to utilise the basic rate band of tax.
By doing this no personal income tax or NI is payable.
George Osborne declared in his Summer Budget, on 8 July, that this system gives an unfair advantage over taxpayers who are employed and are paid a salary subject to PAYE.
To counter the advantage the dividend tax credit will be abolished from April 2016, and replaced with a £5,000 tax free allowance for all taxpayers.
Thereafter all dividend income exceeding £5,000 will be taxed at 7.5% (basic rate band), 32.5% (higher rate band) and 38.1% (additional rate band).
The tax impact of these proposed changes (in a very basic example) would be as follows:
A shareholder with no other income who draws £8,000 salary and £30,945 dividend currently pays no tax and NI. From 6 April 2016 the income tax liability will rise to over £1,700. This increase in tax is subject to clarification within the forthcoming legislation.
It seems inevitable that those who structure their income to receive significant dividends, through a limited company, will have a higher tax liability in future. That is not necessarily the case and we would recommend taking advice to ensure income extraction is being taken as efficiently as possible. This may include changing salary and dividend levels from April 2016.
Dividends paid within tax shelters, such as ISAs and pensions, are unaffected by these changes. These will still be free from income tax and remain the primary place to shield income generating investments from taxation.
We are here to help so please speak to your usual Lovewell Blake contact
to discuss your personal requirements and the tax planning opportunities available.