I am sure there are a lot of people understandingly confused about the Tax changes from April 2016. Here is a summary of my thoughts on the tax changes coming next month – and the impact on Limited Companies. This website also gives a useful comparison of the additional tax payable next year.
Tax Changes 2016/17 – Limited Companies take a Bashing
The changes in the 2015 Budget will bite from April 2016. The Finance Act 2016 still hasn’t been passed – and hopefully George won’t change anything on Wednesday, and this is based on what we know so far….
It is still more tax efficient to pay dividends rather than increase salary – but the tax cost is increasing. This will be payable via self-assessment for 2016/17, so make sure you are putting aside for this.
Dividend Taxation
Until 5th April 2016 dividends paid by any Company include a tax credit of 10% (which could be confusing when forecasting total income). For basic rate taxpayers the tax due is 10% – so effectively tax free. After allowing for the tax credit the additional tax payable has historically been 25% for higher rate tax payers, and 30.56% for additional rate tax payers.
All this has been “simplified” for 2016/17 and will cost you more.
The dividend tax credit is abolished – so if you pay yourself a dividend of £10,000 it is income of £10,000 (not £11,111.11). So the basic rate threshold stretches further. That’s the only good news.
Dividends are now taxed as follows:
- First £5,000 – nil rate(not a tax free allowance, it still counts as income but taxed at 0%)
- Dividends falling within the basic rate tax band – 7.5%
- Dividends falling within higher rate tax – 32.5%
- Additional rate of tax – 38.1%
There are some worked examples to show just how much extra tax will be due compared with last year.
Everyone’s circumstances will be different, and we have looked at a “typical” business owner here. Please check your own situation before using this to make decisions on remuneration. We are here to help.
Employment Allowance
In 2015/16 most registered employers were entitled to the Employment Allowance of £2,000 which can be offset against Employers’ NI. This was beneficial to Director only Companies as well – and the optimum salary last year was in line with the personal allowance at £10,600.
In 2016/17 this is changing. The allowance is being increased to £3,000 which will benefit employers, but it is withdrawn for companies where the director is the sole employee. [Employing a spouse will therefore mean you can be eligible for this allowance, and it is unclear whether 2-director companies can still claim. This is still being debated].
The optimum salary for sole-director companies therefore drops in 2016/17, because payments above the NI threshold will attract both Employees’ and Employers’ NIC.
Our recommendation is therefore to set the salary for 2016/17 at £8,060 per annum – which still protects your NI record for State pension contributions, but remains tax efficient.
Is there any good news?
The Corporation Tax rate is due to reduce to 19% in 2017 and 18% in 2020 – so all being equal your overall tax payments should reduce. 2016/17 will be the worst year for tax (subject to changes in future budgets).
So what is the best remuneration strategy from April 2016 and what tax will be due?
The worked examples assume there is no other income and sole director company. Please do contact us to discuss your own situation.
Here is what I will be recommending:
- Basic salary of £8,060
- Dividends paid for remainder [calculated after Corporation Tax of 20% on company profits]
- Put aside savings for the additional tax due on the dividend under Self Assessment
- £75 per £1,000 of dividends at basic rate
- £325 per £1,000 at higher rate
There are a few tweaks you can make now before the end of 2015/16 to mitigate the changes. Keep reading after the examples.
Read more at The HMRC Dividend factsheet
Tax Planning 2015/16
What can you do now to mitigate the tax due under the new rules?
- Take an additional dividend in March 2016. Maximise the amount you take now at the old dividend rates. You need to ensure there are sufficient reserves within the Company, we can help with this.
- Claim all the costs you are entitled to (obviously within the rules). I have always tended to be a bit relaxed with my own costs on the basis I probably spend more time processing the expenses than I save – “opportunity cost”. I am now much more diligent with monitoring my expenses and will claim every penny I’m entitled to. If you think it may be valid try us, if it’s not we will soon tell you!
- Review your pension and look at putting into a scheme. We can’t advise on this – if you have a Financial Advisor ask them, or Google it. You don’t always need to pay an expensive advisor to put into a reputable scheme.
- Review your company structure, and whether you have family that help out and should be employed, or transferring shares to your spouse to make use of their £5,000 allowance. This can be a risky area, but certainly worth considering.
If you would like to discuss how we can help you structure the tax planning for yourself and your company, please call us on 01684 214900 or email Liz on [email protected]