It pays dividends to plan ahead to save

Further cuts could cause massive pressures on services.

Further cuts could cause massive pressures on services.

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Changes to tax policy on dividend income could have significant implications to company shareholders.

For a long time, basic rate tax payers have enjoyed legislation seeing the 10 per cent rate applied to dividends being offset by a tax credit. With the idea that the income has already been taxed as a profit of the company, this has allowed many to enjoy “tax free” drawings.

For many the idea of structuring their business as a small limited company had therefore been tax efficient. It could be that now may be the time to reconsider, with changes introduced to the taxation of dividends.

The July 2015 Budget saw the introduction of a 7.5 per cent income tax charge on dividend income received from April 6, 2016.

If you’re an owner of a family company, this will very probably influence the way you plan to draw your income in the future.

There will be an exemption applicable to the first £5,000 drawn, but the excess attracts a 7.5 per cent charge for basic-rate taxpayers, a 32.5% charge for higher-rate taxpayers and a figure of 38.1% for additional-rate tax payers.

This certainly eats into the attractiveness of national insurance savings under the current regime.

One option is to improve efficiency is to accelerate dividends into the current tax year, with the view of getting money out while the going is good.

This isn’t an option to everyone, though, as it makes little sense to jeopardise the operations of your company by drawing out money in excess.

This is, of course, not a long term solution to this new “problem.”

With Corporation Tax rates reducing and the possibility of increases in NIC, it is important to talk to your accountant about the options, more so now than ever.

Taking the time to plan and explore the possibilities could potentially lead to large tax savings.