Changes to the dividend tax system are fast approaching on the 6 April 2016. For many business owners, who have previously paid themselves a small salary and then taken the bulk of their incomes in the form of dividends, will now have a significantly higher tax bill.
I advise business owners that now is the time to take action; before the 6 April.
Here are some points for business owners to consider that may help reduce the impact of the changes:
- Accelerate dividend payments – if your business is profitable and you haven’t already done so, bring forward your dividends to the current tax year before the increases apply.
- Consider changing your trading status – while there are still tax savings to be had from being a limited company, these are reduced and at some profit levels, significantly lower than before. It may be worthwhile considering disincorporating either as a limited liability partnership or sole trader. This needs careful consideration and it’s worth remembering that if some of the profits can be retained within the company and not extracted, then the immediate tax liability will be reduced.
- Share the tax burden – couples should consider spreading their taxable portfolios between them to make full use of each person’s tax-free dividend allowance. You can also make full use of personal allowances and basic rate tax bands where applicable, for example, taxable dividends could be paid in the name of the spouse who pays the lowest tax rates.
- Shelter with an ISA – the new rules have no impact on the dividends received from ISAs. You can therefore shelter taxable investments in your ISA and withdraw unlimited dividends completely tax-free. In addition, there is no capital gains tax to pay. You can put £15,240 in an ISA this tax year (2015/16).
- Make your pension work harder – rather than take dividends, you may decide to move company contributions into your pension, taking advantage of the tax relief on the contribution. Like ISAs, pensions remain a good place to shield your income-generating assets from taxation. The pension contribution would be tax deductible for the business (as long as it meets the ‘wholly and exclusively’ test). For this tax year, the annual contribution allowance for most pension investors is £40,000. There is also scope to carry forward unused pension allowances from previous tax years.
- Time to sell up? – for some business owners who are additional rate tax payers, the prospect of putting their businesses up for sale may seem more appealing. If you have a successful, growing, profitable business and pay yourself a dividend, you will pay the 38.1% top rate dividend tax. The top rate of capital gains tax that applies on a business sale is 28%, but this would reduce to 10% if you qualify for Entrepreneur’s Relief.
There is no magic formula or ‘one size fits all’ strategy to deal with the changes. Every business owner will have their own individual requirements and their own aspirations for the future. That’s why it’s vital to speak to a specialist independent financial planner who can advise you on the most tax efficient route that suits your requirements.
By Roger Bourlet, Managing Director of Bourlet Consulting