Limit the effect of the new 2016 dividend tax changes.
With the chancellors new dividend tax legislation about to be introduced we at Stone Accountants have been looking at ways for you to ensure you aren't caught out. Whilst the Summer 2015 Budget dealt an unexpected blow to many limited company owners we still believe there are still many avenues available to you to ensure that your tax bill doesn't rise. With accurate financial planning and by following our advice below, we believe there is no reason why any savvy business owner can't turn these changes into an advantage.
What are the new dividend tax rules?
In the Summer 2015 Budget George Osborne set out a new way in which HMRC would tax dividends withdrawn from limited companies. Everybody is now entitled to a new £5,000 tax free allowance on dividend income. Including the increased £11,000 personal allowance this now means that you can essentially draw up to £16,000 tax free (don't forget there is corporation tax on all dividends). Dividends drawn beyond this limit will then be taxed at 7.5% for basic rate tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate tax payers. These numbers are important to remember as they are concerning your personal tax and will not appear on you companies end of year accounts. This, without proper advice and planning, could lead to a much higher and unexpected tax bill at the end of the year.
What to do with your profits?
Retaining profits in your company - There are no new changes effecting a limiting company from retaining profits within the company. After paying 20% corporation tax a limited company is entitled to keep profits within the company and we expect a number shall. Upon closing your limited company retained profits can be transferred into assets that generally offer a more tax-efficient method of extraction.
Investing in stock and shares - Firstly we must state that you should only ever use spare cash when investing money from your company as there will always be an element of risk. Never invest more than your company can afford to lose. We generally recommend investing in stocks and shares personally, as apposed to via your ltd company, as you would be eligible for £11,100 personal capital gains tax exemption. Limited companies indexation allowance will, in some circumstance, make it more beneficial for your ltd company to purchase the stocks and shares but we always advise that if you are considering a foray into the stock market to speak to a trained professional before you do anything.
Using high interest accounts/bonds - If your company has retained profits that it wont need for a certain period of time this option is a safe and effective way of earning a return on your money. Cash used to deposit into a high interest account or bond is effectively tied up for a certain amount of time and will generally incur a 'withdrawal penalty' if removed before the prescribed date. This is generally an avenue taken by people looking to retire and close a limited company at some point in the near future because, as stated above, extraction of your money via an asset as opposed to a dividend is generally a more tax-efficient method.
Company buy-to-let properties - Most business owners like to invest their profits in property to help build a retirement portfolio and ensure there is something to pass on to their children. This was generally done by withdrawing profits via dividends and purchasing a house personally, but there is now a different option. Your limited company can now purchase a buy-to-let property via its own limited subsidiary, totally owned by your limited company and therefore bypassing all the tax implications imposed by the new dividend tax changes. By offsetting 100% of mortgage interest and all allowable expenses against the income you receive, this option is not only tax efficient but can increase the growth of your property portfolio.
Pensions - Pension plans such as self-invested pension plan or stakeholder schemes allow your company to make pension contributions that are exempt of corporation tax and free of National Insurance (N.I). We advise all of our clients to pay into a pension as you never know what the future might hold for your business. This method of distributing profits can be extremely advantageous the closer your planned retirement is and in certain circumstances you can contribute up to £40,000 per year. If you would like advice on pensions click here to speak to Peter Jenkins APFS of Burfield Financial Planning.
Relevant life cover - A large percentage of business owners are covered with a life insurance premium to ensure their loved ones are compensated should anything happen to them. Most aren't aware that by taking out a relevant life cover policy they can attribute this cost as a deductible expense. As life cover is held in trust it will be paid directly to your nominee upon your death and will not be liable to the new dividend tax laws. Click here to speak to a member of Direct Finance Solutions team for any further advice you may need.
Expenses - Being vigilant in claiming is expenses is one of the biggest tax saving mechanisms. Many business owners just aren't aware of what they can claim as an expenses and aren't actively questioned by their accountants. If you incurred expense whilst performing business duties then you can likely make a claim. This includes everything from using home as an office (which many business owners do) to using your personal mobile to make business calls. If you're ever unsure of what you can and can't claim as an expense make sure to ask your accountant, that's what you pay them for!
Flat rate VAT scheme - HMRC's flat rate VAT scheme in many circumstances can save you money. HMRC charge a flat rate of VAT (discounted by 1% in the first year) on your income, making calculation and planning much easier. This is generally advantageous for businesses that don't have a great deal of reclaimable VAT. We compare traditional VAT against Flat rate using projections/year-end accounts, yearly, for all of our clients. We recommend you give your accountant a call to make sure they are doing the same. For more information click here to view current HMRC guidelines and rates.
Introduce a spouse as a shareholder - This is a practice commonly known as 'income shifting' and is perfectly legal to do. By introducing a spouse who is taxed at a lower bracket than yourself your family can take advantage of their lower rate of taxation by apportioning a certain amount of shares to her. This concept is outlined in the test case Arctic Systems v HMRC in which the court initially upheld HMRC's claim that it could use Section 660a of the Settlements Legislation to challenge this practice. The two latest appeals were won by Arctic Systems and HMRC have resigned themselves to the fact that it is perfectly legal for a married couple to introduce one another as a non-working shareholder for the purpose of receiving income from a limited company.
As with any financial matters we always recommend consulting trained professionals before taking action. For more information on any of the above steps or to seek advice about any other financial matters, click here to speak to one of our team.