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.