With the end of the tax year fast approaching, many business owners 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.
However, one of the most significant changes will be the taxation of dividends from 6th April 2016. I have written before about the detailed changes and the fact that for most company owner-managers, dividends will continue to be more cost effective than a higher salary or bonus post 5th April 2016.
However, dividends will be more
expensive in tax terms from 6th April than in the current tax year. Therefore, all owner-managers, even those paying basic rate tax, should be considering whether to take a larger dividend before 6th April 2016. Consider, for example, a company with a 31st December year end which declares a dividend annually under the old rules. It now has the opportunity to declare a dividend for the first quarter of 2016 as well which will be taxed
under the old, more generous, rules than those which will apply post 5th April 2016.
Higher rate tax payers
A dividend of £50,000 taken before 6th April 2016 will cost £12,500 in tax for a higher rate taxpayer and after 6th April 2016, will incur a
tax liability of £14,625. This assumes that the first £5,000 of this post 5th 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 you will pay more tax on other income which is ‘pushed’ into the higher or additional rate tax bands.
Other
considerations
The company needs to have sufficient reserves to be able to declare a dividend pre 6th April and the 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 6th April will also accelerate by a year the date on which higher rate tax is payable: if paid pre 6th April 2016, the tax will be due by 31st January 2017; if the dividend is paid after 5th April 2016, the tax will not be due until 31st January 2018.
It should go without saying that if you are a higher
rate taxpayer and your company pays you a dividend, you need to keep enough money aside to pay the extra tax. 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.
Noel Guilford
Noel Guilford is the principal of Guilford
Accounting a small business accountancy practice specialising in advising owner-managed businesses on current accounting, finance, and tax matters. You can reach him via email at noel@guilfordaccounting.co.uk or by phone at 01244 660866. He is the author of the best selling book 'Figure it out - an entrepreneurs guide to understanding your
business numbers' which you can obtain by visiting http://guilfordaccounting.co.uk/figureit out.