Dividend income subject to tax increases from 6 April 2016

It was bound to happen some time...

At present there are considerable savings in National Insurance contributions to be made if a minimal amount is paid as salary and any balance of a remuneration package is paid as dividends (particularly for shareholder directors of private limited companies).

From April 2016, the NIC status of dividends is not changing and therefore this strategy is still valid. Unfortunately, the income tax position of dividend income is changing and this may have a direct impact on the overall savings in NIC and income tax that can be achieved.

What’s changing?

From 6 April 2016, the way dividends are being taxed will change. The 10% tax credit is being abolished and each individual will have available a flat rate dividend allowance of £5,000. Any dividends received by an individual in excess of £5,000 will be taxed as follows:

• 7.5% if your dividend income is within the standard rate (20%) band
• 32.5% if your dividend income is within the higher rate (40%) band, and
• 38.1% if your dividend income is within the additional rate (45%) band

Without the tax credit, a dividend income of £30,000 received in 2016-17 would create the following, additional income tax liabilities.

Comparison of tax payable on dividend income of £30,000:

Income tax due if dividend received  is £30,000	2015-16	2016-17
Dividend is within the standard rate band	Nil	£1,875
Dividend is within the higher rate band	£7,500	£8,125
Dividend is within the additional rate band	£9,167	£9,525

Based on these figures:

• if your dividend income is within the standard rate band you would have extra tax to pay for 2016-17 of £1,875;
• if your dividend income is within the higher rate band you would have extra tax to pay for 2016-17 of £625, and
• if your dividend income is within the additional rate band you would have extra tax to pay for 2016-17 of £358.

As you can see, this new tax on dividends will impact standard rate tax payers the most. In all cases any tax liabilities for 2016-17 will be collected 31 January 2018. At the same time, HMRC will also add 50% of the tax liability to your first self assessment payment on account for 2017-18, also due 31 January 2018 with a further 50% due at the end of July 2018.

We advise all readers to take professional advice to see how these changes will affect their personal tax for 2016-17. You will not need to pay addition tax due until 31 January 2018, but there may be planning options that could be employed to lessen the blow.

Don’t let doubts cloud your judgement

Cloud accounting makes sense at a number of levels, so why are some businesses still so reluctant to embrace it?

Although the benefits of storing accounting data in the cloud are now quite well established, we still see a nervousness among some clients to make the leap. It’s strange in many ways that we embrace the online world in so many aspects of our lives, but are wary of embracing it in the work environment. 

The concerns can be summarised as falling into three distinct categories.

The first objection is often around security. People imagine their data is suddenly going to be ‘out there’ for everyone to see and that their business has become more vulnerable. Stopping to think about this for a second though, many small businesses don’t have particularly elaborate security systems in place on their premises. It’s therefore quite possible the data is at greater risk in the real world than it is in the cloud. 

Before you reject the cloud, ask yourself what disaster recovery measures you have in place in the event of your data getting stolen or corrupted. Storing another copy of your accounting information gives you greater resilience if any back-up fails. What’s more, many cloud-based systems advertise ‘bank-level’ security and most of us are quite happy to check our current account or savings online.

The second line of resistance to the new technology is the concern that your accounting will now rely on 24-hour access to the internet. Can we be sure that our broadband connection is always 100% efficient? 

Clearly the reliability of web connectivity may vary by region and supplier, but we now live in a world of instant access to the web via 3G and 4G mobile technology. This means that if, for some reason, your broadband is down, you can still access the data on a smartphone or tablet rather than a desktop. Or, of course, head to another location where it’s possible to access the web. 

The third objection – and perhaps the most difficult to overcome – is simply fear of the unknown. Some people might take the view that if their accounting regime ‘ain’t broke’, as the saying goes, there’s no need to fix it. In our experience, though, many businesses have too little sense of cash flow, who exactly owes them money and when the next invoices are due. When data is collected and processed in the cloud, they can often realise how inadequate their previous systems have actually been.

If you’re able to get past your concerns, there are so many potential advantages. The user-friendly nature of the cloud packages means that you often end up saving valuable time. Free support is available and software updates are processed by the software company without any disruption.

And, of course, your accountant is able to work with you collaboratively – sharing the same screen. 

With monthly subscriptions and the ability to avoid long-term financial commitment, a move to the cloud is unlikely to prove costly and, in most cases, is less expensive than desktop accounting packages. 

Your accountant can help you make the transition fairly seamlessly, as importing data from your current systems is usually straightforward too. So there really isn’t much need for caution. It’s honestly a change that you will be delighted you’ve made. 

Why back-ups should be front of mind

It may be the end of a long day, but the inconvenience of backing up your files is nothing compared to the problems that can result from lost or corrupted data.

How often do you back up your Sage data? What if I said you really ought to be doing it every time you use the package? 

It may sound like overkill but, in the business world, your accounts information is just too important for you to sit back and cross your fingers. Once you get into a routine, you’ll probably find that the back-up process isn’t really that arduous at all.

A common issue is that data can become corrupted over time. Errors creep in. At some point, you’re likely to recognise the problem, but you then need to be able to return to the last ‘clean’ files. Although Sage has a special department which can try to resolve corrupted data, there are no guarantees and the process could cost you significant sums of money.

If you’ve been backing data up, you just need to keep reverting until you reach the point where the files are without errors. At least you then have a starting point for reconstructing your figures and don’t need to begin again from scratch.

Another thing worth bearing in mind is that Sage will prompt you to conduct a data check when you back up. We strongly recommend that you do this, as you get a snapshot of the data integrity and the system will highlight any potential problems. There’s not much point, after all, in backing up data which is already problematic.

So what role should accountants play in all this? It’s certainly true that when there’s a crisis, clients will often go to their professional advisers and ask whether they have kept their own back-up. You may be lucky, but the reality is there’s no obligation for the firm you retain to be doing this kind of work on your behalf. 

Our advice is therefore to back up to a memory stick, external hard drive or to a server. And once you’ve completed your back up, it’s always worth browsing to the destination and checking the files really are there! You can even try restoring them if you want absolute peace of mind, just to make sure that nothing would go wrong in the event that you needed to re-import them in an emergency. 

Increasingly, of course, there are more options to back up in the cloud, via services such as Google Drive and Dropbox. While this is undoubtedly useful, it may be that you’ll feel most comfortable having the data copied locally too. In the world of IT, a belt and braces approach is almost certainly best.

Pensions come into their own

If you’re a business owner who’s ignored pension provision until now, the new regime should make you sit up and take notice.

In the past, it’s been hard to persuade some small business owners to take pensions particularly seriously. Many may have had other investments and will have been relying on them to produce a suitable income in retirement. The restrictions in the pension rules and what you were able to draw down was certainly a psychological obstacle for a number of people.

Since the change in the regulations earlier in 2015, clients have definitely been taking more notice and have been actively reviewing their options. Some have decided to increase their company pension contributions, restrict their personal income and take tax-free cash straight away. As it’s possible to go back three years in your calculations, contributions per individual can be maximised.

When you put in additional pension contributions and draw tax-free cash, it may be possible to preserve your personal allowance for the current year. What’s more, by reducing your income, you may find yourself going down the marginal tax bands.

The company gets relief on the contributions and individuals are entitled to draw up to 25% of the fund as a tax-free lump sum. (If you draw any income, you restrict the amount you can pay into pensions in the future.)

Another point worth making is that the pension fund can be quite a useful and low-cost life assurance vehicle. That’s because if you die under the age of 75, the proposals are that the full fund will go tax free to any nominated beneficiary. 

In some instances, it may be possible for a pension scheme to purchase a commercial property from the individuals that currently own it, effectively releasing equity into their own names. As well as helping with cash planning, this strategy can also reduce exposure to inheritance tax.

So now, with the new regime in place, there are plenty of interesting talking points. Pensions are a more important part of the equation than ever because of the increased freedoms. 

With changes to dividend rules coming into effect in April 2016, we expect to be having even more conversations with clients who are looking at this issue in a new light.

How mums can give birth to new businesses

It’s definitely possible to achieve business success while raising a family.

It’s easy to think that being a mother and owning a start-up business are incompatible. Anecdotal evidence, however, suggests that the phenomenon is becoming more and more common.

Our advice is that if you have a good idea and the confidence to pursue it, you should follow your instinct. Don’t automatically assume that having a young family is going to stop you.

Of course, there’s a need for discipline if you’re going to balance work with family life. If you’re not organised and efficient in the way you work, then you won’t be able to achieve a sense of equilibrium. But it’s usually a matter of working smarter rather than working longer.

Are you generally flexible and adaptable? If so, you’ll be able to deal with the unexpected, which is an inevitable part of running a successful business. Looking after kids may demand many of the same skills, in fact! 

It’s important that you set the terms. You need to work in a way that suits you and shouldn’t think that what someone else has done is necessarily a good model. This is a personal balancing act.

Finding a good accountant and taking their advice is a critical first step. They will advise you on how to get started, the different structures you might consider and the way in which you’re going to remunerate yourself. They’ll also have plenty of advice on potential pitfalls. 

At a practical level, your professional adviser can take charge of admin such as book keeping, payroll, VAT and tax. All responsibilities which can often become a troublesome burden for a fledgling entrepreneur.

So don’t let being a mum stifle your business ambitions or creativity. There’s plenty of help out there and you can make it work.

Changes from the Chancellor

After the July Budget we sift through some of the headline announcements. 

It is, of course, human nature.

Every time the Budget ticks around, we try to work out whether we are better off as a result, or whether we feel as if we’ve been kicked to the curb once again. 

The recent ‘Stability Budget’, delivered on 8th July, was no different, with some potentially major changes being introduced. Post-election, it wasn’t the time for the crowd-pleasing penny-off-the- price-of-a-pint to appease the red-tops. Instead, the Chancellor has given businesses right around the UK something to think about.

The biggest headline grabber was the future cuts in the rate of Corporation Tax. A limited company’s taxable profit will be taxed at 19% for the financial years beginning 1st April 2017, 1st April 2018 and 1st April 2019, and then at 18% for the year beginning 1st April 2020. The 2% reduction is, in real terms, a £1,000 reduction in the tax liability per £50,000 of taxable profit.

Although the figures may not seem ground breaking, they need to be viewed in conjunction with further changes that were announced. The success of Annual Investment Allowance since its introduction back in 2008, has led to its further extension. With the limit having been due to drop to £25,000 from the current £500,000 at which it is set, many welcomed the news that the figure will now, in fact, be £200,000 with effect from 1st January 2016. This means that the first £200,000 (barring transition rules) that a company spends on capital items can be deducted in full against their taxable profits.

One final piece of good news for companies, and employers in general, was the extension of the Employment Allowance, which is now in its second year. The Chancellor announced that from April 2016, it will be increased to £3,000 from the current £2,000 level. This means that an employer can save £3,000 from their National Insurance bill in a tax year. The criteria have been tightened to allow for the increase though, with schemes where a company director is the sole employee no longer being eligible.

More than ever, it’s now a time for business owners to be looking into the changes that are afoot, deciding on the possible ramifications and trying to take full advantage of any opportunities arising as a result. If you are unsure of how the changes might impact your business, take the time to give your accountant a call. They would love to discuss possible growth opportunities with you.

The transfer window is now open

Tax year 2015-16 has seen a change which could save some basic-rate taxpayers more than £200. JODIE STREET explains how the Married Couples Transferable Allowance works.

The essential idea behind the Married Couples Transferable Allowance (Marriage Allowance), introduced in the 2014 Budget, is pretty straightforward. Where one spouse is a basic-rate taxpayer and the other is not using their personal allowance in full, up to £1,060 of their personal allowance can be transferred between the two. This can result in a potential tax saving of about £210.

When we look at the detail, it’s a little more complex, of course.

First of all, as you would expect, people applying for the transfer must be married couples or civil partners, who are basic-rate taxpayers or not using their personal allowance. They must be born after 1935. If not, the Married Couples Allowance would apply. Normally, they must be UK residents too. 

There are, however, groups of transferors who are entitled to a personal allowance for a reason other than being a UK resident. (These include being a national of an EEA state, a resident of the Isle of Man or the Channel Islands, someone who has been employed in the service of the Crown and various other categories.) In such cases, their income must be taxed at the basic rate using the hypothetical net income calculation.

How is this calculated? We assume they were UK resident for the full tax year concerned and were domiciled here in that period (worldwide income and gains included). We also assume that they weren’t deemed non-resident by a double tax treaty and that they have made any available claim for double tax relief on income and gains. If their income isn’t in sterling, it’s calculated using the average exchange rate for the year.

Getting the timing right

The couple involved in the transfer must be married for the full year or part of the tax year, as well as at the time of election. The transferor must elect for the transfer within four years of the end of the tax year concerned. 

If the election is made in the tax year to which it relates, it continues for as long as the qualifying conditions are met, unless it is withdrawn or the couple divorce. If the election occurs out of the relevant tax year, on the other hand, it only affects that year and the individual must apply separately for other years.

Remember, you are only entitled to one allowance per year, even if you are married twice to separate spouses in that period! If you do have more than one spouse, you can only give the allowance to one of them.

You can register your interest by visiting https://www.gov.uk/marriage-allowance and HMRC will then invite you to apply via an email link. It’s the person who is transferring their personal allowance who must apply. You will need your NI number, as well as that of your partner, and must be able to prove your identity online. Even if you make the application during the course of the year, it will apply to the whole of 2015-16.