Reply to: How much more dividend to take out to be tax-efficient?

[Yorkie62]

For what it is worth here is some generic advice I received today from my accountant

With less than a month until the new tax year, and the upcoming changes to the dividend tax rates, now is the last opportunity to consider tax planning to manage your potential exposure to higher rates of dividend tax.

Dividend Tax Changes
In the new tax year the way in which income tax is calculated on dividends will change. The changes are summarised below:
• the existing 10% tax credit will be scrapped and the (sometimes confusing) concept of net and gross dividends will disappear with this;
• a £5,000 tax free dividend allowance will be introduced and dividends declared in excess of this will be taxed at the following rates:
o dividends in the basic rate will be subject to income tax at a rate of 7.5% (previously an effective rate of 0%);
o dividends in the higher rate will be subject to income tax at a rate of 32.5% (previously an effective rate of 25%); and
o dividends in the additional rate will be subject to income tax at 38.1% (previously an effective rate of 30.6%).

Despite the higher rates of tax, a limited company remains the most tax efficient way of to trade as a contractor. The importance of saving money for taxes from each dividend will become more relevant as additional tax will become due at a much lower income level.

Those that ordinarily declare dividends up to the higher rate tax threshold will find that their liability for tax increases beyond £1,000 for the first time. Should this be the case, HMRC will require you to make further payments on account (in advance) at 31st January and 31st July in respect to the following year’s liability.

Accelerated Dividend Payments
The increased rates of tax payable from next year means that, for many, it will be worth accelerating the payment of dividends so that they fall within the 2015/16 tax year and are taxed under the current dividend tax regime. This is particularly relevant if your income regularly exceeds the higher rate threshold, or if you hold large cash reserves for distribution in future years (note that increasing taxable income beyond £100k will not be worthwhile).

Example
A contractor declares dividends to the higher rate threshold each year so not to incur additional tax on dividends, any excess profit is retained in the company for future tax years. In 2015/16 the same strategy has been followed, leaving £50k of profit in the company. Declaring the £50k in 2015/16 will give rise to an income tax liability of £12,500 whereas declaring the same amount (in excess of the higher rate tax liability) in 2016/17 will give rise to an additional income tax liability of £16,250. In this example, accelerating the payment of dividends will save the contractor £3,750.

[TheFaQQer]

Possibly, but I think it's a red herring at best. If HMRC had concerns about dividends, I don't know why they'd focus on one at the end of a tax year (which they'd only know about during an investigation). Surely they'd want to see your dividend paperwork for all dividends issued? Arguing that the total dividend could flag something or that the change between years could flag something has the merit of being internally consistent (if unimportant IMO). Talking about the timing of a specific dividend doesn't IMO and I suspect it flags a misunderstanding of the info. available to HMRC, along the lines of UK Contractor Accountant.

I agree

[jamesbrown]

Maybe the article meant that if you were selected, and you have paid dividends late in the year, then HMRC might be interested in looking into the figures to check that there was sufficient profit to pay the dividend and the paperwork was in order.

That would mean there being an investigation first then looking at the dividends, though - rather than the dividends being some kind of trigger as UK Contractor Accountant implies.

Possibly, but I think it's a red herring at best. If HMRC had concerns about dividends, I don't know why they'd focus on one at the end of a tax year (which they'd only know about during an investigation). Surely they'd want to see your dividend paperwork for all dividends issued? Arguing that the total dividend could flag something or that the change between years could flag something has the merit of being internally consistent (if unimportant IMO). Talking about the timing of a specific dividend doesn't IMO and I suspect it flags a misunderstanding of the info. available to HMRC, along the lines of UK Contractor Accountant.

[TheFaQQer]

Yes, I recall reading that and thinking the same thing. It's wrong. What's more surprising, perhaps, is your equivocation as an accountant (I assume?). If you have some inside track on this, feel free to provide the details on how they would determine these details (to repeat again, not that they matter)...

Maybe the article meant that if you were selected, and you have paid dividends late in the year, then HMRC might be interested in looking into the figures to check that there was sufficient profit to pay the dividend and the paperwork was in order.

That would mean there being an investigation first then looking at the dividends, though - rather than the dividends being some kind of trigger as UK Contractor Accountant implies.

[TheFaQQer]

I assumed removing the spaces and add a .com on the end was the answer.

Possibly - I was hoping that the poster would confirm who they work for, because their advice is interesting.

I look forward to returning in January to see their new site

[northernladuk]

I would have thought people trying to go though MVL before it disappears should be the ones worrying. Funny how many business not tax justifications appear just before the tax benefit is withdrawn........ but I bet nothing will happen.

[jamesbrown]

This is taken from a publication on Contractor UK

Revenue realises it’s the last chance

So there is now a last chance opportunity for all Owner-Managed Businesses (OMBs) such as PSC contractors to draw dividends before the current tax year finishes on April 5th 2016 and benefit from the current rates of tax. Because it is likely that many shareholders will take extra dividends in the 2015/16 tax year, HM Revenue & Customs may wish to review dividends paid late in the current tax year. If your company is one which is selected for such an enquiry, what can be done to safeguard against a challenge by HMRC?

Firstly, decide if your company can actually pay a dividend; to be able to do this a company must have distributable reserves, otherwise a dividend cannot legally be paid. Distributable reserves are the company’s accumulated profits, which have not already been paid out - these appear on your balance sheet. Therefore if each year you have taken all the company’s profits out, you may not have reserves to pay any further dividends. You should check with your accountant who will be able to help you.
The dividend paperwork must be drawn up correctly, so minutes and dividend vouchers should be prepared.

Yes, I recall reading that and thinking the same thing. It's wrong. What's more surprising, perhaps, is your equivocation as an accountant (I assume?). If you have some inside track on this, feel free to provide the details on how they would determine these details (to repeat again, not that they matter)...

[SueEllen]

@UK Contractor Accountant I always pay a large dividend at the end of March. So explain to me why HMRC hasn't complained about this?

[john@UKCA]

This is taken from a publication on Contractor UK

Revenue realises it’s the last chance

So there is now a last chance opportunity for all Owner-Managed Businesses (OMBs) such as PSC contractors to draw dividends before the current tax year finishes on April 5th 2016 and benefit from the current rates of tax. Because it is likely that many shareholders will take extra dividends in the 2015/16 tax year, HM Revenue & Customs may wish to review dividends paid late in the current tax year. If your company is one which is selected for such an enquiry, what can be done to safeguard against a challenge by HMRC?

Firstly, decide if your company can actually pay a dividend; to be able to do this a company must have distributable reserves, otherwise a dividend cannot legally be paid. Distributable reserves are the company’s accumulated profits, which have not already been paid out - these appear on your balance sheet. Therefore if each year you have taken all the company’s profits out, you may not have reserves to pay any further dividends. You should check with your accountant who will be able to help you.
The dividend paperwork must be drawn up correctly, so minutes and dividend vouchers should be prepared.

[northernladuk]

@UK Contractor Accountant - can you tell me which company you work for?

Ta

I assumed removing the spaces and add a .com on the end was the answer.

[Maslins]

If a dividend is legal, it's legal. The paperwork should be prepared accurately in all cases.

This. I see no reason why HMRC would spark an enquiry just because dividends were high. They're going to love it, lots of people who would've stuck to £30k divis suddenly paying much more on the basis of 25% tax now better than 32.5% next year. Short term = big win for HMRC coffers.

[jamesbrown]

[TheFaQQer]

@UK Contractor Accountant - can you tell me which company you work for?

Ta

[john@UKCA]

The paperwork should be prepared accurately in all cases.

yes all contractors have accurately prepared paperwork for dividends

[northernladuk]

Well I guess that brand has pretty much had it's day lol...