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Dividend Tax from April 2016

Dividend Tax from April 2016

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What are peoples views on the new 7.5% dividend tax ?

Sounds like really bad news for most of the companies who I act for, as well as holders of quoted companies.

For clients who do not mind self employment, almost means that they maybe better looking at self employed again.

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By whiteways
09th Jul 2015 08:56

A little more number crunching.

Figure if I simply put my 2 casual paid under NIC limit secretaries on the payroll I can still claim EA? So that would be that problem solved.

As far as dividends are concerned, the abolition of dividend tax credit would seem to help as presumably there's no more grossing up?

Hence, taking my regular gross dividend of 15K, The net payment to me is currently 13.5K. CT cost 15K X 20% = 3K Effective rate 3K/13.5K X 100% = 22.22%.

Cost of the same dividend from 2016 - CT 13.5K at 20% = 2.7K. Tax on dividend after 5K tax free allowance, 8.5K X 7.5% = 637. Total cost 2700 +  637 = 3337. Effective rate 3337/13.5K X 100% = 24.72%. 

So effective rate is just over 2% more than before, which would be virtually wiped out by 2020, as CT rates fall to 18%.

Clients would have to be similarly looked at on a case by case basis.

My concern is that, if memory serves, Osborne said this was a "start" in removing the incentive to incorporate, so what more does he have up his sleeve?    

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By pawncob
09th Jul 2015 09:11

All I can say is

What a bloody good idea.

 

About time someone sorted out the state sponsored tax avoidance that is the SME regime.

 

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By frankdavid
09th Jul 2015 09:13

End in sight for IR35 ?

Will this signal the end of IR35 ? quite a clever way of doing it without the need to abolish NIC's and increase tax rates to compensate which would be political suicide if the public knew just how much NIC's (ers and ees) added to their tax bill

 

 

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By PMAT
09th Jul 2015 14:24

Dividend Tax and possible link with IR35?

frankdavid wrote:

Will this signal the end of IR35 ? quite a clever way of doing it without the need to abolish NIC's and increase tax rates to compensate which would be political suicide if the public knew just how much NIC's (ers and ees) added to their tax bill

 

 

I must say that this is a clever idea by Osborne (or should I say his advisers). It will come at a cost to many OMB's which is obvious, and an unfair way of treating genuine business owners.  I can see this in the longterm putting an end to IR35 - (I hope) as it is far to complex for clients to get their head around. 

Signatures on this petition would be helpful and feel free to pass on to your clients.

http://www.ipetitions.com/petition/no-dividend-tax-for-small-business-ow...

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By JamesAnd
09th Jul 2015 10:02

Going back to Andy Furniss comment...

Currently a dividend of say £20k could be pad with no IT due.

Under new regime you could gross the dividend up to £22222 less £5k then at 7.5% = £1,292. So the director has received £20,930. So better off by £930.

What am I missing?

 

 

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By Myriam
10th Jul 2015 12:51

the tax!

The director might be able to withdraw another £2K in dividends to arrive at the same gross income but he is also paying out £1,292 in tax he wasn't paying before.

In the current scenario he was leaving that other £2K in the company, not giving more than half of it to HMRC!

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By Wanderer
09th Jul 2015 10:08

@JamesAnd

Are you sure you gross the new dividend up?

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By JamesAnd
09th Jul 2015 10:18

Wanderer...

What my example is trying to show, hopefully to back up other comments, is that a higher dividend can be paid and still be better of under the new regime. I was comparing a current dividend of £20k that is assessed on the ITR at £22,222 - now a dividend of the gross amount not net amount could be paid.

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By BananaMan
09th Jul 2015 10:27

Reserves/cash

JamesAnd wrote:

Wanderer...

What my example is trying to show, hopefully to back up other comments, is that a higher dividend can be paid and still be better of under the new regime. I was comparing a current dividend of £20k that is assessed on the ITR at £22,222 - now a dividend of the gross amount not net amount could be paid.

 

But the company has to have increased reserves and cash in order to pay a higher dividend. In the cases where it does not, this wouldn't be possible

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By JCresswellTax
09th Jul 2015 10:20

you cant be better off by paying more tax

I see what you are saying, but you are not better off.  sure you have more cash in your hand but you have less reserves in your company and have still paid more tax.

Definitely not better off.

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By stephenkendrew
09th Jul 2015 10:28

You are not better off!

At the moment, a company makes £25,000 profit. It pays tax at 20% and declares a dividend of £20,000. Assuming no higher rate tax the total tax liability will be £5,000.

Under the new rules the company makes the same profit, pays the same tax and declares the same dividend. The shareholder will, however, have tax to pay of £1,125 (20,000 less 5,000) x 7.5%.

The company has paid the same tax. The shareholder has paid £1,125 more tax.

The taxman is the only person who is better off.

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By JamesAnd
09th Jul 2015 10:29

But for most single director companies the aim is to maximise cash extraction by this being a better tax vehicle than self employment. They don't tend to be set up for long term investment and thus cash reserves built up.

And in my example the company's tax bill doesn't change as it's PCTCT doesn't change.

So if he can now tax £22,222 from the company rather than £20k and still be better off. Yes he has suffered a £1200 personal tax bill but he has an extra £900 in his hand.

Still don't know what I am missing.

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By JamesAnd
09th Jul 2015 10:49

@ Bananaman

I accept what you are saying and obviously if there are not enough reserves then a higher dividend cannot be paid.

Stephen.

But the director is going to have a tax bill anyway. So if he normally receives a dividend of £20k then he would have a tax bill of £1,125. So he is only going to receive £18,875.

But in my example (again assuming reserves) he would have a tax bill of £1,292. Net income of £20,930 so an increase of £2,055 with only extra tax of £167.

 

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By gbuckell
09th Jul 2015 11:07

Errr

£20k div - old regime nil tax if within basic rate band

New regime £15k @ 7.5% = £1,125 so worse off by £1,125

The tax credit in the old system is not tax paid and it has been abolished in the new system.

On disincorporation I cannot see much of that happening. The benefits of incorporation are still there just much smaller. Too small to make it worth incorporating in the first place until profits approach £50k.

On the plus side higher rate taxpayers with buy to let properties and significant borrowing will be encouraged to incorporate!

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By youngloch
09th Jul 2015 11:22

I believe genuine businesses will still incorporate though.

Any client at risk of paying higher rate tax just because they have a large bank balance, or debtor balance is still going to be well suited to the company model.

Just the risk of that happening is a good reason to consider incorporation especially when you consider payments on account for the self employed/partnerships.

Add in other genuine advantages of limited liability and it is still attractive and, gives the advantage of being able consider possible tax planning to be in control, where possible, of the personal tax liability.

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By youngloch
09th Jul 2015 11:17

Have I found a few clients that I can give good news to?

Remember the child benefit threshold of £50k.

Granted, this is for the "lucky" higher earners but stick with me here....

These are clients with proper businesses who get employment allowance because they have staff and therefore are commonly on a lower salary of circa £8000.

Bear in mind when I mention tax to pay I know that they would pay some anyway under current rules but I am just focusing on the new additional 7.5% here.

I have several clients with companies who plan not to draw a gross income of more than £50k to avoid losing child benefit which for a family with 3 children is £2501 per annum. That £2501 is lost between £50k and £60k an effective additional tax of 25.01%.

CT of 20%, personal tax (currently) of 25% on dividends plus this 25% on child benefits (for 3 children less/more depending on number) makes it almost pointless for anyone earning more than £50k per annum to draw it from their business - unless they can take MUCH more than £60k as they have a marginal rate of 65%

Currently then they aim to stop at £50k gross. But of course the gross now equates to more cash:

Currently: Salary of £8000 (exclude any Employment Allowance issues here) plus gross dividends of £42000 gives you the £50000 but £42000 dividends are only £37800 in cash.

If they stuck with the same dividends next year they would pay ADDITIONAL tax on those dividends of £2460 (7.5% x £32800) but next year they can take more cash out - remember this is a company with good reserves, probably building because it's not worth taking the cash out

So next year they can take salary of £8000 and real cash dividends of £42000 given the £50000 in hand compared to £45800 in cash.

The ADDITIONAL tax charge is of course higher £2775 (7.5% x £37000) but from a cash perspective then:

Do nothing with dividend levels and get cash of £8000 plus £37800 less ADDITIONAL tax of £2460 = £43340 (remember the total tax would be higher because they already pay some tax under current rules)

or increase dividends to take advantage of the removal of the dividend tax credit and get cash of £8000 plus £42000 less ADDITIONAL tax of £2775 = £47225

So they are better off in cash terms in their personal hands by £3885

AND RETAIN THE CHILD BENEFIT

This works, I think (my brain is sore from the last 24 hours) for those with good company reserves probably building up but restricting what they take because of child benefit cost.

They may of course also want to consider taking a huge dividend this year to utilise built up reserves lose child benefit (for one year), but lock in a higher rate tax charge at 25% rather than pay 32.5% over future years unless that is we believe they are going to reduce this tax charge in later years once the deficit is sorted.

I for one am not banking on that and foresee this 7.5% increasing once it becomes the norm............

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By mrme89
09th Jul 2015 11:17

Any minute now...

Bob will turn up to tell us how compliance is dead.

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By JamesAnd
09th Jul 2015 11:25

@ gubuckell

Agreed worse off when comparing the old regime to the new.

But my point, and I think andy furness, was that he would be stuck with a tax bill anyway under the new regime. At least with my example he is receiving more income without a comparable increase in tax.

 

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By lionofludesch
09th Jul 2015 11:30

Wait and See

It wouldn't surprise me if some of this changes on its passage through Parliament.

Meanwhile, I need to read through this stuff in more detail .............

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By nick farrow
09th Jul 2015 11:35

marginal tax effect on higher rate

say £20,000 dividend in basic rate band at 7.5% = £1,500 but say further £5,000 previously in higher rate band but now exempt so £5,000/4=£1,250 net increase £250?

is there any logic in that?

 

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By gbuckell
09th Jul 2015 11:39

Logic?

Who said there was logic in tax?

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By scottun
09th Jul 2015 11:47

Pension Contribution

Quick question...Would a personal pension contribution reduce tax liability.  2016/2017 Example: Salary 11K, Dividends 30K (Tax Owed: £1,875.00)    Would a personal pension contribution of say 5K reduce the tax by 5,000 x 7.5% (£375.00)? Bearing in mind 20% will be accredited back in the pension scheme (assuming thresholds not reached etc etc)

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By Stuart.thomson
09th Jul 2015 11:48

Which is the top slice of income

Currently dividends are at the top slice of most people's tax comp. However now that Buy to Let Interest is capped at 20%, there is a concern that the 7.5% dividend rate will be pointless. BTL income will for some bring income thresholds up such that tax on dividends is at the higher rates.  It would be better if the BTL interest was calculated separate to Rental Income and optionally above or below dividend income.

Will the drafting specify the order of taxable income/deductions so that this is clear?

I look forward (with concern) to the detailed drafting! Although I expect simple drafting reflecting the existing position with just rate changes!

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By hughjoyce
09th Jul 2015 12:56

Lobbying

Can the chamber of commerce, fsb or one of the accounting bodies lobby about this and get it spelt out in ways most people understand on the national news?? If this was a tax cut applied to other groups of people the media would be all over it but as it is fairly complex to anyone outside the tax industry there is a danger it will sneak in under the radar.

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By MBK
09th Jul 2015 13:05

@JamesAnd

What you are missing is the the company had to earn an additional £2,222 grossed up for Ct in order to pay the dividend. So you're not comparing apples with apples.

If company earned £20k post tax and just paid that out then shareholder's tax is £15k @ 7.5% = £1,125. That's the true measure of the additional tax take.

It's good for us accountants though. We've had a quick tot up this morning and we reckon at least an extra 100 SA returns to do each year for those who aren't in the SA system as their dividends had never resulted in a tax liability. Now pretty much all of them will have a liability.

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By MikeyBaby
09th Jul 2015 13:08

What are you missing?

Corporation tax.

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By JamesAnd
09th Jul 2015 13:28

@ MBK

I don't disagree and have said I accept that there needs to be the reserves/profits.

But the tax hike is £1,125 if you compare to the current rules. On the basis that we are stuck with these tax hikes I am now comparing the tax hike using different dividend rates paid under the new rules which show a reasonably decent increase in income compared to the increased tax. I don't for one minute suggest this is a perfect "solution" but it is better than nothing.

Yes, the company would have to pay out £22,222 as opposed to £20,000 but we are talking about single director companies whose purpose is not usually to accumulate reserves. As stated before, these sort of companies are normally set up to maximise the income of the owner. 

It might change the owners approach though. They might decide to take minimum dividends to accrue larger reserves and be taxed at 10% when they close down the company.

 

 

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By JamesAnd
09th Jul 2015 13:30

@ Mikeybaby

don't see why - all dividends are paid post CT

 

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By brian-scholar
09th Jul 2015 16:40

I'm wondering

with many directors drawing a salary under the ni limit, there being some PA available, will it now be possible to reclaim some of the tax paid on the dividends?

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By hughjoyce
09th Jul 2015 16:48

Was wondering the same

brian-scholar wrote:

with many directors drawing a salary under the ni limit, there being some PA available, will it now be possible to reclaim some of the tax paid on the dividends?

 

Would be good if true. I am not sure all the detail has been worked or thought through. I have just contacted the FSB

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By dropoutguy
10th Jul 2015 13:37

Incorporation

A point on Mr Buckell's comment about incorporating lettings businesses with significant borrowings, is there not a problem here?

If the borrowings reduce the net assets below the level of the gains on the properties, then s162 relief is limited to the net assets value and the balance is immediately chargeable as a gain. (?)

 

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By paj3333
05th Dec 2015 09:04

New Dividend Rules 2016
How will the new rules impact dividends paid from an SPV (limited company) to another limited company who then pays dividends to its individual shareholders. The individual shareholders are using a limited company to invest in the SPV. The SPV will pay corporation tax on profits and distribute the remaining profit as dividend to its shareholders, one of which is another limited company which will be liable to corporation tax on its profits including the dividend received from the SPV ? This company then pays dividends to its individual shareholders. How does the dividend paid from the SPV avoid been taxed twice, firstly in the second limited company and then by the individual shareholders of the second company. Clarification will be greatly appreciated.

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