46 taxation Higher tax rates for dividends – coming soon


The Press widely reported the 2015 Summer Budget announcement of higher tax rates on dividends. As many business owners pay dividends as part of a tax-efficient remuneration strategy this set the phones ringing, writes Holly Bedford-Bell of HMT LLP


Tax advisers rushed to read the new rules only to find there was nothing in the draft 2015 Finance Bill, leaving us all guessing. It transpired that the legislation will be released with the 2016 Finance Bill. However, HMRC has issued examples and further explanations that show how the new rules will work, with some surprises.


The main points to note are from April 6, 2016:


• The dividend effective tax rates at each level are increasing by 7.5%.


• There is a £5,000 tax-free allowance for dividend income.


• The old system of a notional tax credit and grossing up of dividends that confused so many people will disappear.


The comparative effective rates of tax on dividends are as follows: Income tax band


Basic rate: 20% Higher rate; 40%


£5,000 tax-free?


HMRC has now clarified that the £5,000 tax free allowance for dividends is a nil-rate band not an exemption. This distinction means that the £5,000 band uses up the taxpayer’s lower-rate bands, which can push taxable dividends into higher-rate bands.


Example: A person has employment income of £40,000 and £9,000 of dividend income. The £11,000 personal allowance is used against the £40,000 of employment income, leaving £29,000 of employment income taxable at the basic rate of 20%. This leaves £3,000 of the basic- rate band (£32,000 in 2016/17)


7.5% 25% Additional rate: 45% 30.56%


32.5% 38.1%


remaining. The £5,000 dividend allowance covers this remaining £3,000 of the basic-rate band first, leaving £2,000 of the dividend tax- free allowance to use in the higher- rate 40% band. The remaining £4,000 of dividend income is all taxed at the higher rate of 32.5%.


Are dividends still better than salary?


For business owners, although the benefits are smaller than they used to be, using dividends in place of higher salaries is still generally tax-efficient. It is worth reviewing the numbers for your personal circumstances and income levels to identify the potential savings.


2015/16 Effective rate 2016/17 Proposed rate Nil


Advance planning


Business owners should consider accelerating or making one-off dividend payments before April 6, 2016 to pay tax at the current lower rates. Where large dividends are routinely paid, the tax savings could be significant. The ability to pay dividends is, of course, subject to the company’s reserves and cash availability.


At HMT, we have assisted many clients with tax-efficient remuneration and dividend strategies.


Details: Holly Bedford-Bell hbedford-bell@hmtllp.com 01491-579740 www.hmtllp.com


Businesses are missing out on valuable tax breaks


Small-to-medium businesses are missing out on valuable tax breaks for research and development simply because bosses are unaware that they qualify.


Despite a surge in R&D tax credit claims submitted to HMRC, thousands of eligible companies are not participating, says Paul Duckworth, a partner in tax services to businesses at Smith & Williamson, the accountancy, investment management and tax group.


He said new HMRC figures put the value of R&D tax credits at £1.75 billion for 2013/14, the latest figures available, with total claims going up by 19% and those submitted by small and medium enterprises (SMEs) up by 23%.


He said: “However, that leaves thousands of businesses missing out on an incredibly valuable source of funding –


www.businessmag.co.uk


especially those in the early years of trading and often under pressure from a cashflow perspective.


“These business owners are either unaware of the potential benefits of R&D tax credits or possibly think they do not qualify. This might be costing them vital funding if they are spending money innovating and advancing technology.”


R&D tax credits, first introduced in 2000, allow companies incurring costs in developing new products, processes or services to receive a cash payment or tax deduction. The average annual claim for an SME claimant in the UK is £48,000.


Duckworth said that from April 1 this year the Government increased the SME R&D uplift on qualifying spend to 230% and the rate of tax credit repayable on surrendered losses for large companies to 11%. He said:


“Loss-making SME businesses are now eligible for a repayment of up to 33% of qualifying expenditure, whereas those which are in profit can save tax at the rate of 46% of qualifying expenses.”


SMEs can benefit from an enhanced rate of R&D tax credits compared with larger businesses. To qualify, SMEs must employ fewer than 500 people and have either an annual turnover of no more than €100 million or a balance sheet total not exceeding €86m.


“However, there has been a 10% decline in SMEs claiming both payable credits and a deduction from the corporation tax liability, potentially due to unawareness that the two can be combined,” said Duckworth.


He added that many sub- contractors working for larger companies were unaware they could claim (just 660 claimed


out of 3,950 large company scheme claims made in the 2013/14 tax year) – compared with 16,160 SME R&D claims in the same period.


Duckworth said some industry sectors were lagging behind and yet to capitalise on the benefits of R&D tax credits – with construction and real estate and finance and insurance amounting for just 2% and 1% of the total.


“This is surprising considering the technological developments in construction methods, the advent of online estate agents and the increasing automation of many financial services as IT projects often qualify for the R&D tax credits.”


R&D claims by finance and insurance SMEs in the tax year 2013/14 averaged £88,000, significantly higher than the national average of £48,000 for all claims.


THE BUSINESS MAGAZINE – THAMES VALLEY – DECEMBER 15/JANUARY 16


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