Dividend Tax Increase In April

The end of the tax year is in sight so now is an appropriate time to be reminded of the changes to the way dividends are taxed come April 6th 2016:

In summary, from April 6th 2016, tax payers will be given a new £5,000 tax free allowance on dividend income. Any dividends received beyond that limit will be charged at:

  • 7.5% for basic rate taxpayers (previously 0%)
  • 32.5% for higher rate taxpayers (previously 25%)

This tax is paid personally using the self-assessment system.

Depending on your plans for any reserved company profits you may consider withdrawing a dividend before the end of the current tax year.

Other effective ways to mitigate this additional tax include:

 

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[Updated] Pension tax relief reduction. Deadline 16th March.

March 7th Update:  The changes highlighted below have been dropped by George Osborne – this will come as a relief to high earners looking to make pension contributions in the near future.

The government has been reviewing pension tax relief and changes are suspected to be imminent.

It is predicted (but not confirmed) that the chancellor will make an announcement on the 16th March 2016 which will immediately reduce the amount of higher rate tax relief given to future pension contributions.

In short, if you are a higher rate tax payer and likely to be making a pension contribution soon then you may consider finalising this before the 16th March.

Conversely, if you are a standard rate tax payer and planning on making a pension contribution then you may consider waiting until after the announcement.  The relief given to standard rate tax payers is likely to increase.

Hargreaves Landsdown has a clear summary of the effects on their website:

http://www.hl.co.uk/pensions/important-rule-changes-in-2016

Merry Christmas & Opening Hours

Firstly, thank you to all of our clients for choosing Tempo during 2015.

We wish you all a very Merry Christmas and a Happy New Year!

 

Opening Hours

As always, we make it as easy as possible for our team to spend time with their families over Christmas and the New Year.  As such, we operate a reduced level of telephone support from 24th Dec – 4th Jan.   Apologies if you call and find you are greeted by an answering machine!  Please leave a message for any urgent queries.

How to have a Happy (Tax-Deductible) Christmas

Christmas Parties for Employees

The festive season offers an ideal opportunity for you and your staff to get out of your normal workspace for a Christmas party, and it’s a great way to show your appreciation for all their hard work during the year. Even better, providing you stick to the HMRC guidelines, the party expenses are tax deductible too.

The guest list:  Keep in mind that in order for the expenses to be tax deductible, the party must be open to all employees, and each employee can bring one partner/spouse too. As the director of a limited company, you are also considered to be an employee. However, non-employees (including clients or suppliers, for example) are not included in this allowance.

The budget:  You can claim up to £150 for each employee and their non-employee guest per year. This does not have to be at one single event, as long as the total cost per year, per head, does not exceed £150. This also includes all the associated costs of organising the event such as travel to the venue, accommodation, and the food, drink and entertainment during the actual party.

Benefits in Kind:   If you exceed £150 per person in one year, even by £1, there will be a ‘benefits in kind’ charge for each employee and they will have to pay tax and Class 1a NICS on the whole amount spent per head on the function. So it makes sense to organise a modest event rather than blow the budget!  Also remember, the £150 is not an allowance, but a maximum limit for the actual cost, so don’t feel you have to spend the full amount.

A note for Scrooge:   This applies to all expense claims, of course, but remember you can’t simply claim back £150 cash allowance from your business and not hold a party – you can only claim for legitimate expenses incurred for an actual event!

Christmas Lunch for Clients or Suppliers

Freelancers, self-employed individuals and contractors who don’t have staff to celebrate with may consider taking their most valued client out for a Christmas lunch to show their appreciation. However, this is classified as business entertainment and is not tax deductible, and you can’t claim VAT back either. However, treating your best client to lunch has relationship-building potential that may prove well worth the money – and after a glass of mulled wine they might be willing to give you a cheeky heads-up on next year’s projects too…

Finally, don’t forget to keep all your receipts and upload them to your Tempo account as soon as possible to keep your expenses on track.

Enjoy the party!

Closing a company with a large cash reserve

MEMBERS VOLUNTARY LIQUIDATIONS

Tempo Accounting would like to introduce our clients to Invocas Financial, a firm of Business Recovery and Debt Solutions Specialists. Amongst their range of services, we believe there is one particular process which may be well suited to those of our clients who are wishing to close their limited company which has a large cash balance (e.g £25K onwards).

Please find below comments from their Licensed Insolvency Practitioner, Adam Southard:

I would like to begin by thanking Tempo Accounting for providing me with the opportunity to speak to their clients about a process called Members Voluntary Liquidation (MVL). Please don’t be put off by the “Insolvency” in my job title or the “Liquidation” terms used. These do usually create a negative impression however I can assure you that a MVL would be purely of benefit and positive impact to you.

A MVL is a legal process suitable for the closure of a solvent company i.e. there is a cash or asset surplus. I would be appointed as Liquidator of the company by you as the shareholder(s) and be able to quickly distribute the surplus cash or assets to you. Thereafter I would file certain forms at Companies House to formally close the company.

The key benefit with this process is a tax saving for you. The distribution to you through the MVL would be classed as a capital distribution (rather than an income distribution) which attracts Capital Gains Tax rates that are lower. This means you will be in a better net position as a result, despite there being costs of the MVL process. You may also qualify for Entrepreneurs’ Relief which would reduce the tax rate to 10%, thereby benefiting you further.

If you are interested in finding out more about the MVL process you can download from http://invocasgroup.com/email/MVLflyer.png an information sheet. I would also be happy to talk to you directly and your contact at Tempo Accounting could facilitate an introduction.

In advance of proceeding you should discuss your tax position in detail with Tempo Accounting and be comfortable that the MVL process is right for you.

I hope the above has highlighted a way, of which you may not previously been aware, that you can close your limited company in a tax efficient manner.

Thank you for taking the time to read the above and I hope I can be of assistance to you in the future.

Adam Southard

The 2015 Budget’s Dividend Tax Increase

No doubt the biggest 2015 Budget announcement for most small business owners is the increased personal tax on Dividend income.

Currently, dividends are tax free up to the Higher Rate Tax threshold and tax at 25% of Net thereafter. In April 2016 this changes.

Only the first £5K of dividends received will be tax free. The tax on all other dividends will increase by 7.5%. So, the originally 0% tax on dividends will now be taxed at 7.5% and the 25% will increase to 32.5%.

Here’s an approximate “before and after” comparison for a few realistic scenarios for an individual receiving dividend income from their limited company. These examples assume no income other than a £12K gross salary and the dividends shown:

£12K Salary + £27K dividends

  • 15/16 Tax year: No personal tax incurred.
  • 16/17 Tax year: £1,650 personal tax on dividends. (Increase of £1,650)

£12K Salary + £30K dividends

  • 15/16 Tax year: £663 personal tax on dividends.
  • 16/17 Tax year: £1,875 personal tax on dividends. (Increase of £1,212)

£12K Salary + £40K dividends

  • 15/16 Tax year: £3,163 personal tax on dividends.
  • 16/17 Tax year: £3,625 personal tax on dividends. (Increase of £462)

£12K Salary + £50K dividends

  • 15/16 Tax year: £5,663 personal tax on dividends.
  • 16/17 Tax year: £6,875 personal tax on dividends. (Increase of £1,212)

£12K Salary + £60K dividends

  • 15/16 Tax year: £8,163 personal tax on dividends.
  • 16/17 Tax year: £10,125 personal tax on dividends. (Increase of £1,962)

Interestingly, those least affected are those receiving £36K net dividends on top of a £12K salary. The increase in dividend tax would be only £162 for the year.

Those most effected are those who’s income stayed below the Higher Rate Threshold and those taking large amounts of dividends.

Tempo’s online calculators will be update in due course to see how this will affect you personally.

One suggested course of action is to ensure that excess company profits are taken as dividends in the current 15/16 tax year rather than waiting for the less favorable 16/17 year.

Most Freelancers / Consultants trading via a limited company will now need to save at least some provision for their Self Assessment tax liability where-as, previously, many individuals managed to avoid this by ensuring their income stayed below the Higher Rate Tax threshold.

31st July – Next Self Assessment Payment Deadline

31st July Payment Deadline

Individuals who completed a 13/14 self assessment may have a “payment on account” deadline coming up at the end of next month – 31st July.

HMRC usually sends a postal reminder  if there’s something due but get in touch with Tempo if you are unsure.

The payment due on the 31st July is the second half of the “payment on account” for the 14/15 tax year and is based on the amount of tax you incurred in the most recently submitted self assessment.

 

HMRC Online Services

The best way to review what payment HMRC expects is by signing up for a government gateway account here.

 

14/15 Self Assessments

Now is also a good time to start reviewing what your personal tax bill for Jan ’16 may look like.

You can preview your higher rate tax bill on Tempo by clicking “Higher Rate Tax” from Tempo’s main menu.  Make sure your dividend records are up to date first.

If you’ve not informed HMRC that you need complete a self assessment then you can register online.  All UK based limited company directors need to do this.

Contact Tempo to begin the Self Assessment process.