HMRC is making changes to the way in which credit interest and dividends are taxed following the announcement made by the Chancellor in the summer Budget last year.
From 6 April 2016, credit interest will be paid gross, which means that tax will not be deducted when the interest and/or dividend is paid into an individual's account. The current system of treating dividends as 'tax paid' in the hands of shareholders (which was one ninth of the dividend received) will be scrapped.
Clive Lewis, ICAEW Head of Enterprise explains how these changes may impact Limited Companies and offers some advice for startup businesses wondering what business format they should adopt.
The business format chosen will affect the amount of tax the start-up pays. It will also impact other areas such as liability for losses, so it should be decided after consideration of the issues.
Also, you have unlimited liability and you could therefore risk personal loss if something were to go seriously wrong. Sole traders include an annual self employment return with their income tax return and pay income tax and national insurance contributions on the profits.
All partners include an annual self employment return with their income tax return as well as a partnership tax return (showing how profits were divided between the partners) and pay income tax and national insurance contributions on their share of the profits.
However, there are a number of additional legal requirements with limited companies which can substantially add to the time and money spent on administration. Companies file a corporation tax return with HMRC which summarises its annual trading results and pays corporation tax on the taxable profits.
Companies must submit annual accounts and other information to Companies House.
The current system of treating dividends as 'tax paid'(or with a notional tax credit) in the hands of shareholders is scrapped. The dividend tax credit which was one ninth of the dividend received is abolished
The new system of taxing dividends gives each taxpayer a new dividend tax allowance of £5,000. Dividends received by taxpayers in excess of the dividend allowance (and after using any remaining personal allowance) will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for those taxpayers on the highest incomes who pay additional rate income tax.
From 2016/17 choosing a limited company will be less tax efficient - a business needs to make profits approaching £40,000 to be tax efficient and to cover the costs of being a limited company.
Deciding which business structure to choose is not solely dependent upon the tax treatment
The following comparison will illustrate the effect of the dividend tax changes starting in 2016/17.
The figures include some assumptions such as salary to the sole director of a limited company of £8,000 (to minimise national insurance costs) and remaining profits distributed as dividends, which may not always apply.
Profit £30,000 £6,000 £4,388 £1,612
Profit £40,000 £8,900 £6,388 £2,512
Profit £50,000 12,790 £9,053 £3,737
Profit £75,000 £23,290 £19,053 £4,237
Profit £30,000 £5,775 £5,120 £ 655
Profit £40,000 £8,675 £7,720 £ 955
Profit £50,000 £12,485 £10,320 £2,165
Profit £75,000 £22,985 £21,470 £1,515
Figures are illustrative only. They include some assumptions including tax and NIC rates for 2016/17 which could alter in the March 2016 budget
If you are a director/shareholder of a limited company you should speak to your accountant urgently about your remuneration strategy and whether you should get dividends paid before 5 April 2016.
You may also want a discussion on whether to change your business formant from a limited company to a sole trader or partnership, although this has its own implications which need to be fully understood. Alternatively you can talk to an ICAEW BAS adviser.
What do you think of the dividend tax changes? Login or sign up to UKBF to comment.
From 6 April 2016, credit interest will be paid gross, which means that tax will not be deducted when the interest and/or dividend is paid into an individual's account. The current system of treating dividends as 'tax paid' in the hands of shareholders (which was one ninth of the dividend received) will be scrapped.
Clive Lewis, ICAEW Head of Enterprise explains how these changes may impact Limited Companies and offers some advice for startup businesses wondering what business format they should adopt.
What business format should a startup adopt?
If you are thinking of starting a business, one of the first decisions a start-up business you will have to decide is what business format to adopt - sole trader, partnership or limited company?The business format chosen will affect the amount of tax the start-up pays. It will also impact other areas such as liability for losses, so it should be decided after consideration of the issues.
Sole trader
Setting up in business on your own gives you complete control and fewer administrative burdens.Also, you have unlimited liability and you could therefore risk personal loss if something were to go seriously wrong. Sole traders include an annual self employment return with their income tax return and pay income tax and national insurance contributions on the profits.
Partnership
If you choose to run a business with two or more people together as partners, you will share profits or losses and unlimited legal liability. You must make to define the rights and responsibilities of partners and to set them out in a partnership agreement.All partners include an annual self employment return with their income tax return as well as a partnership tax return (showing how profits were divided between the partners) and pay income tax and national insurance contributions on their share of the profits.
Limited Company
A limited company is a legal entity separate from its owners. Ownership can be changed or extra capital raised through the selling of shares, without necessarily affecting the management of the company.However, there are a number of additional legal requirements with limited companies which can substantially add to the time and money spent on administration. Companies file a corporation tax return with HMRC which summarises its annual trading results and pays corporation tax on the taxable profits.
Companies must submit annual accounts and other information to Companies House.
Important changes to the taxation of dividends from limited companies
The 2015 summer budget changed the way dividends are taxed. Changes come in the tax year beginning 6 April 2016.The current system of treating dividends as 'tax paid'(or with a notional tax credit) in the hands of shareholders is scrapped. The dividend tax credit which was one ninth of the dividend received is abolished
The new system of taxing dividends gives each taxpayer a new dividend tax allowance of £5,000. Dividends received by taxpayers in excess of the dividend allowance (and after using any remaining personal allowance) will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for those taxpayers on the highest incomes who pay additional rate income tax.
From 2016/17 choosing a limited company will be less tax efficient - a business needs to make profits approaching £40,000 to be tax efficient and to cover the costs of being a limited company.
Deciding which business structure to choose is not solely dependent upon the tax treatment
The following comparison will illustrate the effect of the dividend tax changes starting in 2016/17.
The figures include some assumptions such as salary to the sole director of a limited company of £8,000 (to minimise national insurance costs) and remaining profits distributed as dividends, which may not always apply.
Tax and NIC for 2015/6
S Trader Ltd Co DiffProfit £30,000 £6,000 £4,388 £1,612
Profit £40,000 £8,900 £6,388 £2,512
Profit £50,000 12,790 £9,053 £3,737
Profit £75,000 £23,290 £19,053 £4,237
Tax and NIC for 2016/17
S Trader Ltd Co DiffProfit £30,000 £5,775 £5,120 £ 655
Profit £40,000 £8,675 £7,720 £ 955
Profit £50,000 £12,485 £10,320 £2,165
Profit £75,000 £22,985 £21,470 £1,515
Figures are illustrative only. They include some assumptions including tax and NIC rates for 2016/17 which could alter in the March 2016 budget
If you are a director/shareholder of a limited company you should speak to your accountant urgently about your remuneration strategy and whether you should get dividends paid before 5 April 2016.
You may also want a discussion on whether to change your business formant from a limited company to a sole trader or partnership, although this has its own implications which need to be fully understood. Alternatively you can talk to an ICAEW BAS adviser.
What do you think of the dividend tax changes? Login or sign up to UKBF to comment.
