With the new tax year rapidly approaching, a specialist accountancy firm has urged limited company contractors to carefully consider their tax planning in readiness for the new dividend tax rules which come into effect on 6th April 2016.
These changes are designed to bring an extra £2.5bn in taxes for the government in the first year alone – but, as a result, contractors could see their tax liabilities being significantly increased if they do not plan accordingly now according to specialist accountants Nixon Williams.
The Government has introduced these changes to tackle what it terms ‘tax-motivated incorporation’, whereby some individuals form their own limited companies simply to reduce their tax bills. HMRC also wants to simplify the current system, which was put in place when corporation tax was higher than it is now.
The tax will have a significant effect on take-home pay, as you can see by looking at this comparison table.
For example, the difference in take-home pay for a contractor whose company has a turnover of £100,000 will be around £4,000 – assuming that a salary of £8,060 is taken, alongside all available dividends.
So what can you do?
In the long term, once the changes come in, there will be a number of things which you can do to minimise your tax liability, and this is something that you should discuss with a specialist contractor accountant. However, you still have a number of options which can be put in place to maximise your tax benefits before the changes come into effect on April 6th. Some of the key measures to consider are as follows:
Draw down more dividends now
If you have enough retained profit within the business, then you may wish to consider taking a one-off dividend before the end of the 15/16 financial year. The higher rate and additional rate tax liabilities on dividends before the change will be lower under the current dividend tax rules.
However, if you are unsure or have any questions, you should speak with your accountant who can be able to tell you exactly how much you can draw down from your company at any given time, as well as the tax implications of doing so.
Splitting your dividends with a spouse
If your spouse is a shareholder within your business and earns less than you do, then it could be beneficial for you to split your dividends with them, as they will be able to earn more before hitting the higher tax threshold. Particularly if you choose to take additional dividends before the start of the 2016/17 tax year.
If you are living together, then there are no capital gains tax nor Settlements Legislation implications either, as long as the shares are ordinary shares with equal rights.
However, you need to be aware of the so-called ‘Husband and Wife’ tax legislation (officially Section 624) which states that ‘HMRC now expects to see evidence that the dividend paid to a non-spouse can be justified through the non-fee-earner’s active involvement in the company’s affairs’. So just make sure before you do this that you can prove that your other half has an active involvement in your business – for example looking after all of your company administration and so on.
Thanks to Nixon Williams for providing this information. If you have any questions about the dividend tax changes, or about contracting and starting a limited company, please contact their new business team on 01253 362062 or email email@example.com.