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How changes to dividend tax rules could affect you
Hidden away in the chancellor’s summer budget were some proposed changes to the way dividends are taxed, which will have a significant impact on those who choose to draw profits from their businesses by way of dividends, writes Owen Kyffin, director, Whitley Stimpson
I have no doubt that this will clearly start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities.
The changes will also affect investors, including pensioners with large share holdings and could cause them to change their strategy in relation to investing for income.
It is proposed that from the beginning of the financial year in April 2016 the dividend tax credit will be abolished and a new dividend tax allowance of £5,000 a year introduced. There will also be new rates of tax on dividend income exceeding the new dividend tax allowance of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Under the current regime a company making a profit of £46,000, with the shareholder/ director taking a PAYE salary of £8,000 would
pay corporation tax at 20% of £7,600 on its net taxable profit leaving it with £30,400 to pay out as a dividend. Once grossed up for the
New tax relief rules could hold back tech sector
Accountancy firm Baker Tilly is warning that new rules introduced in this year’s finance bill could jeopardise growth plans for tech businesses in the south.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are government initiatives which offer attractive tax breaks to small businesses in the UK. EIS offers tax breaks to investors purchasing shares in small private companies, whereas SEIS is aimed at those investing in even smaller companies.
'I’m concerned that high- growth tech businesses such as software companies in the south will inadvertently be the victims of new legislation'
Both schemes, along with Venture Capital Trusts (VCTs), have raised billions of pounds worth of funding for small businesses, and helped drive investment in many companies – particularly in the technology sector. However, as a result of EU direction, new stricter rules affecting the EIS and VCT schemes
THE BUSINESS MAGAZINE – THAMES VALLEY – SEPTEMBER 2015
were introduced in the recent summer Budget and finance bill, which could harm some businesses’ growth plans.
These new rules impose:
• A limit on the age of a company that can apply for EIS or VCT finance. The Government had initially proposed an age limit of 12 years, but this has now been reduced to seven years in the finance bill, albeit with some exceptions.
• A limit in the total lifetime risk finance funds which are raised by a company of £12 million – £20m for knowledge-intensive companies.
• The rule that no VCT or EIS funds are to be used for the acquisition of other companies or trades.
Kirsty Sandwell, Baker Tilly’s head of corporate finance in the south, said: ”These new rules will only add to the existing complexity of these important and successful schemes, and I’m concerned that high-growth tech businesses such as software companies in the south will inadvertently be the victims of new legislation.
Kirsty Sandwell
”The rules could deter acquisitions made to compliment or develop existing technologies or create wider market applications, and yet ironically it is these very companies that George Osborne is keen to help grow in the UK. It’s possible that the Government inadvertently may have switched off the tap to a vital source of funding for many businesses in the south.”
www.businessmag.co.uk
notional tax credit, this would still fall within the shareholder’s basic rate band and they would therefore have no personal liability to Income Tax. The net profit retained by the shareholder/ director would be £38,400.
Under the new regime from April 6, 2016, the company would still have £30,400 to distribute as a dividend, but the recipient would now have a liability on this of £2,280, reducing the retained cash to £36,120.
These examples ignore National Insurance and the proposed reduction in the corporation tax rate with effect from April 1, 2017, but are intended to show the general change of principle.
The Government also made it clear that investors who receive significant dividend income, for instance from very large shareholdings of more than £140,000 and assuming a 3.5% yield, would also pay more than they do currently.
If you think you are likely to be affected contact me for more specific advice.
Details:
01295-270200
owenk@whitleystimpson.co.uk
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