BUSINESS WITH CONFIDENCE

Transcription

1 Dividend rules Wednesday 12 August 2015 The webinar will begin shortly. Dividend rules Part 1 Wednesday 12 August

2 Introduction Today s moderator: Anita Monteith, Technical Manager - Tax Faculty Today s speaker: Rebecca Benneyworth VAT Changes in 2015 Tax Faculty membership benefits TAXline monthly journal TAXline tax practice TAXline tax planning Access to the tax referral scheme Free webinars Discounts on courses Subscription ( 53 to 63.60) 2

3 Ask a question Participate in today s webinar send us a question Audio problems if you experience poor sound quality you may benefit from selecting Use Telephone from your Audio Mode settings Rebecca Benneyworth 3

4 Dividend tax Abolish tax credit no more grossing up Dividend tax allowance 5,000 Better to regard this as a zero rate band for dividends Does not use up BR / HR band for non dividend income But does use up BR band for dividend income Tax rates 7.5%, 32.5%, 38.1% Dividend income investors Basic rate taxpayer worse off if dividend exceeds 5,000 Nil tax liability vs 7.5% on excess over 5,000 More use of ISA s? Higher rate taxpayer better off Until dividends reach 21,667 Additional rate taxpayers better off Until dividend reaches 25,400 4

5 Dividend income OMB Here, dividend is the majority of the income So the loss of 5,000 basic rate band is key Salary 8,000 Dividend in addition 3,000 of personal allowance available against dividend Tax calculations on dividend Dividend = 10,000 Within PA 3,000 Taxable dividend 7,000 5,000 at nil Tax at 7.5% on 2,000 = 150 Previously nil, but gross income higher 5

6 Tax calculations on dividend Dividend = 40,000 Within PA 3,000 Taxable 37,000 Liable at HR 5,000 do this now so that rate is correct Dividend tax : 5,000 x 32.5% 32,000-5,000 (exemption) at 7.5% Tax = 3,650 Overview of tax position If dividend is the only source of taxable income then the exemption saves a maximum of 5,000 at 7.5% = 375 Where taxable non dividend income is in HR band, exemption saves at 32.5% = 1,625 Similarly in additional rate band, saving is 1,905 6

7 Loss of personal allowance New dividend exemption does not reduce taxable income Regard it as a zero rate band So total dividend is included in income for personal allowance calculation But of course will no longer be grossed up so a better outcome for those with income near the limit Example personal allowance Non dividend income of 85,000 Dividends of 20, /16 : Income for abatement = 85, ,222. Loss of personal allowance 3, /17 : income for abatement = 85, ,000 Loss of personal allowance 2,500 7

8 Incorporation Advice Incorporation The incentive to incorporate has been waning Particularly at lower profit levels The changes in December 2014 have also had an impact BUT must factor in other costs these are ignored here The incentive provided by goodwill has gone 8

9 The numbers - assumptions Single shareholder / sole trader Tax and NIC (Class 2 abolished 2016) All company profits extracted Assume salary around NIC start point = 8,000 Balance as a dividend No cost differentials recognised Admin company accounts; CT return; company secretarial; payroll; P11D Business motoring Incorporate 2015/16 Profits Sole trader Company Saving 20,000 3,100 2, ,000 6,000 4,388 1,612 40,000 8,900 6,388 2,512 50,000 12,790 9,053 3,737 75,000 23,290 19,053 4, ,000 33,790 29,053 4,737 9

10 Review the simple solution Diminishing tax savings over time Bigger relative savings at low profits 20,000 produces tax saving of 23% 30,000 shows a saving of 27% But can these businesses cope with being a Limited company? Practical lower limit is probably 40, dividend tax changes Sole trader Company % Saved 20,000 2,875 2, ,000 5,775 5, ,000 8,675 7, ,000 12,485 10, ,165 75,000 22,985 21, , ,000 33,485 32,

11 Marginal rate on 100 profit This shows the combines corporation tax and dividend tax rates Basic rate taxpayer 26.0% Higher rate 46% Additional rate 50% Reducing rate of CT Compensates in part for the changes In some cases taxpayers are barely worse off over the 5 year period BUT think about potential rises in Class 4 rate 11

12 Tax charge 2015 vs 2020 Profit ,000 2,400 2,298 30,000 4,400 4,713 40,000 6,400 7,128 50,000 9,063 9,543 75,000 19,063 20, ,000 29,063 31,728 NIC rate to 12% in 2016? Sole trader Company % Saved 20,000 3,233 2, ,000 6,433 5, ,313 40,000 9,633 7, ,913 50,000 13,180 10, ,860 75,000 23,680 21, , ,000 34,180 32, ,210 12

13 Umbrella companies Exploiting the temporary workplace rules HMRC to restrict tax relief for travel Where the worker is under the control, supervision and direction of the end user This term used in FA 2014 in relation to agency workers May affect IR35 safe clients Anita Monteith Technical Manager - ICAEW Tax Faculty 13

14 Beware the settlements legislation Anti-avoidance legislation rendering ineffective certain settlements of income which result in a tax saving Income is deemed to be that of the settlor for tax purposes Illustration Jack and Jill are married. Opt to trade as a company, buy an off-the-shelf company and each take a 1 share. Jill, a higher rate taxpayer, does most of the fee-earning work. Jack does a little admin and is a basic rate taxpayer. Funds are extracted as dividends. If the settlements legislation applies, HMRC can reallocate Jack s income and tax it as Jill s, with interest and penalties if appropriate. S 619 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) onwards What is a settlement? Transfer into a trust Other dispositions, covenants, agreements, arrangements and transfers of assets, S 620(1), ITTOIA 2005 May be direct or could be by an indirect provision of funds NB There must be an element of bounty for the settlements legislation to apply 14

15 Gifts to spouses There are a number of statutory exemptions from the settlements legislation S626, ITTOIA 2015 exempts situations where the property passed to a spouse is an outright gift, unless: The gift does not carry the right to the whole of the income arising, or The property given is wholly or substantially a right to income. For more information TAXline Tax Practice No14 The settlements legislation HMRC Trusts, Settlements and Estates Manual, such as Any questions? 15

16 Ask a question VAT Changes in 2015 Future hangouts & webinars Webinar: HMRC digital developments for tax agents 25 September 2015 This webinar seeks to bring agents up to date with developments and the practical impact for agents will be explored. We also propose to update agents on any developments with HMRC s tax agent strategy, if any. Register now at /webinars Practical Tax conference 09/10 October 2015 In the fast changing world of tax, it can be difficult to stay up to date. Our annual Practical Tax conference has been designed to address this, with expert speakers who ll not only bring you up to speed on the issues that matter, but will share their unique professional insights. Book now at /events 16

17 Thank you for attending Please take the time to fill out our short survey Contact the Tax Faculty. +44 (0) /taxfac ICAEW will not be liable for any reliance you place on the information in this presentation. You should seek independent advice. A world leader of the accountancy and finance profession 17