Just to remind you of the changes being implemented, as of 6 April 2016 the dividend tax credit is being replaced by a £5,000 tax-free dividend allowance. Sums above this will now be taxed according to the following rates:
2016/17 | 2015/16 | |
Basic Rate | 7.5% | 0% |
Higher Rate | 32.5% | 25% |
Additional Rate | 38.1% | 30.6% |
1. What can be done pre 6 April 2016
If your business has the available funds, then one short term solution is to extract more money from your company this financial year in order to take advantage of the lower tax rates. This can be done by simply paying yourself a larger dividend before 5 April 2016. Although, if you pick this option you must ensure you set aside enough money to cover the additional tax in your 2016/17 return. Another option is to:
- Pay yourself a dividend;
- Invest into a series of Enterprise Investment Scheme (EIS) qualifying companies and
- Use the resultant 30% income tax credit from the investment to offset the vast majority/all of the income tax payable on the dividend (at effective rates of 30.56% or 25% respectively, depending upon whether you are a higher or additional rate tax payer)
2015/16 | 2016/17 | Difference | |
Dividend - £ | 100,000 | 100,000 | - |
Effective rate of tax | 25% | 32.5% | 7.5% |
Tax - £ | 25,000 | 32,500 | 7,500 |
Net cash extracted - £ | 75,000 | 67,500 | 7,500 |
EIS investment required to reduce to nil, i.e. tax/30% - £ | 83,333 | 108,333 | 25,000 |
2. Post 6 April 2016
After April 2016, in order to ensure you have a tax efficient remuneration structure in place it is going to be even more important that you review the way in which you withdraw your funds. However, as mentioned before, for the majority of people it is still going to be more efficient to take dividends. For example, if you were to swap your £80,000 dividend for an equivalent salary you would receive a net of £62,925. If you continue to withdraw this as a dividend, your net would be £71,013.
However, there are a few ways in which you can potentially mitigate your tax liability. These involve altering and diverting the way in which you withdraw cash from your company. Some potential options are:
- Increase your pension contributions and benefit from the 25% tax free withdrawal if you are over 55 years old
- Bring in family members to utilise their basic rate
- Create trusts to pay care home, university or school fees and reduce the higher rate tax on the dividend
- Add interest to a shareholder loan
If you would like advice on your personal circumstances, please contact me at lee@raffingers.co.uk and I will be happy to talk through your options.