NEW RULES FOR DIVIDENDS FROM 2016/17

In the Summer Budget Newsletter we outlined the new rules for the taxation of dividends that will apply from 6 April 2016. Further guidance has now been published by HMRC setting out how the new rules will operate and it seems the rules don’t work as many people expected.  As previously reported, there will be no 10% credit against the tax on dividends which means there will be a 7½ % increase in the rate of tax on dividends once the £5,000 dividend allowance has been used up. Currently dividends falling into the basic rate band are effectively tax free.

However the £5,000 allowance needs to be taken into consideration in determining the rate of tax on your dividends. For example if you have salary and other non- dividend income of £40,000 next year and £9,000 in dividends, the £4,000 of taxable dividends are taxed at 32.5%, not £3,000 at 7.5% then £1,000 at 32.5%. This is because the £5,000 is added to the £40,000 income pushing the taxable dividends into the higher rate band.

If you own your own company it may be beneficial to bring forward dividend payments from next year to save the additional 7½ %. However, it would be important to consider all of the tax implications of such actions so come and talk to us to discuss your options.

How do new interest rules affect my buy to let property?

Changes announced in the Summer Budget may  significantly increase your tax liability if you have a property business – including a single buy to let – read on….

Now

At present, full tax relief is available for interest on a loan used in a property business.  The funds may have been used to purchase the let property, to make major repairs, or just to fund the working capital of the property business.

From April 2017

From April 2017, tax relief on interest in property businesses ( including single buy to lets) will be restricted so that by 2020, interest will not be an allowable expense in computing the profit of the business, but instead will attract tax relief at 20%. The change does not affect furnished holiday lettings.  The change will be phased in as follows:

 

2017/18 2018/19 2019/20 2020/21
% of interest allowed as a deduction 75 50 25 0
% of interest given as a relief at 20% 25 50 75 100

A letting activity that has a low level of interest in relation to the borrowings will not be too badly affected, but where there is a higher level of borrowing, individuals will find that the business model has been severely undermined.

So how will this work?

Example 1

Jo is a 40% taxpayer. He has purchased a buy to let property as an investment. Here is the effect of the changes:

 now  2020/21
 Gross rents 7,200 7,200
 Repairs, agents fees and other tax deductible costs 1,000 1,000
 Mortgage interest 2,500
 Net rental profit 3,700 6,200
 Tax at 40% 1,480 2,480
 less interest relief at 20% 500
 Net tax liability on rental income 1,480 1,980
tax increase 500
effective tax rate on “real” rental profit 40.0% 53.5%

   

Example 2

In this case Jo has a bigger mortgage and hence more interest:

 now  2020/21
 Gross rents 7,200 7,200
 Repairs, agents fees and other tax deductible costs 1,000 1,000
 Mortgage interest 5,000
 Net rental profit 1,200 6,200
 Tax at 40% 480 2,480
 less interest relief at 20% 1,000
 Net tax liability on rental income 480 1,480
tax increase 1,000
effective tax rate on “real” rental profit 40.0% 123.5%

 

The tax due is more than the net funds available from the rental surplus by £280.

The new rules may also push a tax payer into the higher rate band, result in reduction of personal allowance or trigger the repayment of child benefit.

What are your options?

  1. Incorporation – has tax and other cost implications and borrowing often not easy
  2. Reduce borrowing so impact is less
  3. Sell property
  4. Accept the increase if expected capital gain on property makes it worthwhile

 

Please contact us to find out how this will impact on you.

01763 – 853633

enquiries@liricaccountants.com

“Reconsider the new Dividend Tax for small businesses”.

Uproar amongst business owners, the entrepreneurs of now and the future  has resulted in a petition being put to the Government to which there is now an official response :

“The Government is committed to supporting entrepreneurs and a fair tax system. Dividend tax reform allows further cuts in Corporation Tax and reduces the incentives for tax motivated incorporations.

The Government is fully committed to supporting business and entrepreneurship. As set out at the Summer Budget 2015, the Government believes that one of the best ways to support growth and enterprise in the UK is through lower and more competitive Corporation Tax rates.

Owners of small companies will also benefit from a range of other measures announced at the Summer Budget, including an increase in the National Insurance Employment Allowance to £3,000 from April 2016 and a permanent increase to the Annual Investment Allowance to £200,000 from January 2016. They will also pay less tax as a result of the increases to the tax-free Personal Allowance to £11,000 and to the Higher Rate Threshold to £43,000 in April 2016. We also have a commitment to go much further, taking the Personal Allowance to £12,500 and the Higher Rate Threshold to £50,000 by the end of this Parliament.

However, it is not possible to continue to reduce the Corporation Tax rate without looking at the overall balance of the tax system, including taxation of dividends. Lowering the Corporation Tax rate without action elsewhere increases incentives for individuals to set up a company and pay themselves through dividends to reduce their tax bill (also known as tax motivated incorporation). Therefore the Government is reforming dividend taxation. These reforms, which will also simplify the dividend tax system, will significantly reduce the incentives for people to set up a company and pay themselves through dividends rather than wages simply to reduce their tax bill. Taxpayers and the Exchequer will now be £500 million better off as result of reduced incentives for tax motivated incorporation. Those who choose to work through a company continue to pay lower rates of tax than the employed or self-employed. But the reforms move the overall tax rates for the self-employed and those incorporated closer together, making the system fairer overall.

HM Treasury”

Click this link to view the response online and register your name:

https://petition.parliament.uk/petitions/106525?reveal_response=yes

 

The Petitions Committee will take a look at this petition and its response. They can press the government for action and gather evidence. If this petition reaches 100,000 signatures, the Committee will consider it for a debate.

 

Tax Investigations Update

HMRC collected an additional £26.6bn from compliance in 2014/15, and has been given an additional £800m to pursue non-compliance and tax evasion. Please click to download the latest Tax-Investigations-Update-Sept-2015.pdf (820 downloads)  which highlights the increased risk posed by current HMRC activity and tactics. If you are not currently insured with us then do contact us

Are you paying enough?

From the 1st October 2015 the new National Minimum Wages (NMW) will come into force

Year 21 and over 18 to 20 Under 18 Apprentice
2015 (from 1 October) £6.70 £5.30 £3.87 £3.30
2014 (current rate) £6.50 £5.13 £3.79 £2.73

 

With a further increase in April 2016 for over 25’s to £7.20 per hour. The April 2016 wage will be called the Living Wage.

Penalties for non compliance are already harsh and as reported by the BBC on 1st September 2015 they are getting tougher…

These include doubling penalties for non-payment and disqualifying employers from being a company director for up to 15 years.

The government also announced plans to double the enforcement budget for non-payment and to set up a new team in HMRC to pursue criminal prosecutions for employers who deliberately do not pay workers the wage they are due.

Penalties for non-payment will be doubled, from 100% of arrears owed to 200%, although these will be halved if paid within 14 days. The maximum penalty will remain £20,000 per worker.

​Are you paying enough?

Dividend tax following the Summer 2015 Budget

One of the major announcements in the Summer Budget, affecting owner managed businesses was the proposed changes to dividend taxation.  Very little was announced on Budget Day but the Government have now published a factsheet providing further details on the Dividend Allowance which also provides examples of how the new tax allowance will work when it comes into force on April 2016.

 

To recap:

From April 2016 the dividend tax credit will be abolished and a new dividend tax allowance of £5,000 a year will be introduced. Dividends received up to £5,000 will be covered by the new Dividend Allowance and will be tax free, but dividends exceeding this amount will be taxed at the following rates:

 

  • 7.5% on dividend income within the basic rate
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band

 

The Dividend Allowance factsheet gives 6 useful examples demonstrating how individuals could be affected.  Click here for a copy of HMRC’s Dividend Allowance Factsheet

 

Although the Governments headlines say “this simpler system will mean only those with significant dividend income will pay more tax”, we believe that in most cases where business owners extract profit by way of dividends, the new rules will lead to an increase in their tax liability.

 

With a split of income of £8,000 (to trigger basic national insurance) and £40,000 dividends received you will be £1,450 worse off in 2015/16.  A salary of £8,000 with £50,000 dividends will result in £2,200 additional tax.

 

Recipients of dividends who were previously did not have a tax liability will now have to pay tax if they are in receipt of dividends in excess of £5,000 and they will need to register with HMRC and complete a self assessment tax return to report this.

 

It is important therefore to plan for these changes in the current tax year.  It may be worth paying additional dividends in 2015/16, assuming there are sufficient distributable reserves, even if this accelerates the payment of income tax for those liable at the higher or additional rate of tax.

 

Call Liric now to find out how the new rules will affect you – 01763 853633.

 

Summer Budget 2015

Following the General Election, the Chancellor presented a second Budget to the House of Commons on 8 July 2015. The Budget contained some important announcements and confirmed a number of changes planned for the coming years. Some unexpected changes in the extraction of profits from Limited Companies will mean that dividend policy needs to be carefully reviewed.

We have put together a PDF newsletter Second-Budget-2015.pdf (753 downloads)  which contains the latest tax and financial information, which we trust you will find useful. For more information on how the changes may affect you, please contact us.

Changes to National Insurance

The Government has recently introduced a number of changes to national insurance and further measures affecting both employers and individuals are in the pipeline. Our factsheet provides an overview of some key changes, as well as offering advice on a range of strategies to help minimise your national insurance bill.

HMRC Target online sellers

Thousands of online sellers will need to get their tax affairs in order as HMRC wields its expanded powers to get user information from online marketplaces like Amazon, Gumtree, Ebay and Etsy. The Revenue has sent 14,000 letters to traders suspected of running a business and failing to declare this on their tax returns. Of these, 1,000 letters are being sent to people where the taxman has already identified a shortfall on their self-assessment forms.The new crackdown was launched on the back of extensive new powers introduced last year enabling HMRC to download people’s account information. It was reported in theTelegraph that eBay, Etsy, Amazon and Gumtree are being forced to hand over customer account details, including their selling activity, as part of the taxman’s legal powers that were extended last year.

The HMRC also avoided stating exactly what the threshold is where an online seller becomes an online trader. Instead, the Revenue uses the badges of trade as their guiding principle.. The criteria used to assess if an activity is a hobby or a business are:

  • The size and commerciality of the activity.
  • The frequency of the activity and transactions
  • The application of business principles.
  • Whether there is a genuine profit motive.
  • The amount of time devoted to the activities.
  • The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).

Some of the 14,000 targeted thus far had made as little as £100 profit online.

“Anyone just selling the occasional item has nothing to worry about. This is about making sure on-line traders pay the right tax – wealthy or otherwise. We will make contact with those that we are aware might need our help to get it right,” said a HMRC spokesperson.

The spokesperson went on to confirm that those continuing to avoid the Revenue’s overtures, could face penalties and that the taxman “will determine the amount of tax due based on the information we have available”.

HMRC have some great examples to help you decide, for example:

Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.

In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.

She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.

She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.

Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality. She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT. Many traders start off in a small way and assume their activity will be treated as a hobby. They don’t realise that if it grows into a business they need to register with HMRC. You should register as Self Employed as soon as your hobby becomes a commercial venture, even if you are losing money! 

If you don’t register, HMRC will be looking for you and if you have an online business it won’t be hard for them to find you. If you need any help with registering as Self Employed just drop me an email or book a free call with me at www.liricaccountants.com

April newsletter

Its been a busy month so have a quick catch up of the topics that could affect you in our April newsletter

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