It is a Monday afternoon, and as promised I shall elaborate on my last blog and consider how the new dividend income rules will affect you if you are extracting profit from a Limited Company – and more importantly some things to consider that might help ease the pain.
I went into detail about the monetary effect that the new tax will have in a previous blog, (see here) but let’s just recap on a few things.
Changes to Dividend Tax
· Every individual will be eligible to receive £5k tax free in dividends, regardless of any other earnings
· No “grossing up” of dividends (if you don’t know what this means, the good news is that you no longer need to!)
· 7.5% Tax rate for Basic Rate taxpayers
· 32.5% Tax rate for Higher Rate taxpayers
· 38.1% Tax rate for Additional Rate taxpayers
So, is it still worth being a company?
With the numbers clearly showing an increase in personal tax for owners of Limited Company businesses, is it still worth being a Limited Company? Before you all rush to disincorporate, it is worth thinking about the other benefits of being a Limited Company.
1. Limited Liability – if things go wrong, it is the business that will incur the liability, not you as an individual
2. Public perception – rightly or wrongly, there is a general public perception that Limited Companies are bigger and more trustworthy than non-incorporated businesses
3. Investors – if you have, or want to have in the future any investment from an external source, the chances are they would want to invest in a Limited Company
4. The future – The government have committed to a Corporation Tax rate of 18% by 2020 (so a 2% saving from the current figure) and have hinted towards a Basic Rate band increase to £50,000. There are also no guarantees on what may happen to Class 4 National Insurance contributions for the self employed in the next few years as the government has not included these on the taxes that they will not increase…
Easing the pain
I will run through a few ideas for how your business might be able to ease the pain of this additional tax. There is no simple answer, and as with most things it is worth assessing the potential tax saving with the hassle of implementing these ideas. Please also seek professional advice before implementing any of the following suggestions.
1. Pay your spouse
You can consider paying your spouse or partner a salary of up to £8.060 if they are in a lower or the same tax bracket than you.
Obviously there are some pretty important caveats to this – you physically need to pay them, they actually need to perform work and the rate must be appropriate for the job and hours. They would also need to be included on a payroll scheme and reported to HMRC in the same way as any other employees. Also, as daft as it sounds there could also be issues with unfair dismissal if things with your partner take a turn for the worse!
2. Pay your children?
If you have teenage children that are constantly burning a hole in your pocket, why not get them to work for their pocket money!? If they are 13-15 years old for example, they can work a maximum of 12 hours per week. The same rules apply as above, but surely they could be useful to help with filing or with updating a website or social media?
If we look at this with some fairly extreme numbers – they could earn £5 x 10 hours x 45 weeks =£2,250 per annum. Before you do this it is worth checking any local authority rules, and be aware that any tax inspectors would probably look closely at this in the light of an investigation. Also, given that it is the children taking the money, you would have little to no chance of seeing this money again!!
3. Spouse or civil partner shares
As mentioned at the start, each individual is eligible for £5,000 of tax free dividend income, so why not give some shares to your partner in order to facilitate that? It is worth noting that shin this situation you should always give the shares to your spouse from your shareholding, rather than issue new shares straight to them.
4. Pay yourself a rent?
You could pay yourself a rent for the use of home. Currently, the HMRC accepted rate is £4 a week, however there is nothing to stop you charging more if you have a formal agreement in place between yourself and the company. The rent should be at a market rate, and you should be able to justify this (using a proportion of bills applicable to said room for example). I would suggest though that most people could justify £250 per month, if they are working from home full time? Please note though that this is taxable income and will go on your tax return, less any applicable costs. Also, it is important that you don’t use rooms exclusively for the business in order to avoid any CGT issues when you come to sell the house.
5. Make sure you are taking advantage of all the tax free benefits
- Mileage allowance – make sure you claim 45p a mile for any business mileage (or 25p for any mileage over 10,000 miles in a year
- Mobile phones / ipads – these can be used privately with no taxable benefit BUT the contracts must be in the name of the company, not the individual
- Staff entertaining – there is a £150 per head allowance for staff entertaining each year, so maybe treat the staff to a Christmas meal. (Even if there are only two of you!)
6. Accelerate your dividends
Any dividends you declare before 5 April 2016 will be taxed at the old rates, so make sure you are maximising these (but remember there needs to be the retained profit in the company in order to declare them!)
7. Pay yourself interest
If you are owed a significant chunk of money by the company why not consider paying yourself interest on the outstanding value. It needs to be at market rate, and again would be taxable on your personal tax return.
8. Pay into a pension
Last, but by no means least, if you do not already do so through your limited company, we highly recommend paying into a pension.
The contributions are tax deductible against the profits of the company, with contributions per individual up to £40k into a pension per annum. The downside of this is that you won’t be able to draw on this cash until you are 55, so if you need the cash quickly this isn’t an option. If you haven’t revisited your pension situation in the last few years we highly recommend speaking to an IFA. If you don’t have one, we can give you the contact details of some good ones.
I hope the points above make sense, and at least give you something to think about. If you don’t do any of the above then please be aware that you will have extra tax to pay from January 2018.
If you wish to discuss any of these points above please do get in touch. For existing clients we will be discussing these with you in due course, as part of our usual tax planning.