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Dividends

Tax Planning Opportunities Before the Change to Dividends from 6 April 2016

Those with significant income in the form of dividends have the potential to make large income tax savings by bringing forward the dividends they draw from their companies to before 6 April 2016. In some cases the saving available could easily reach five figure so serious consideration should be given to the timing and quantum of dividend payments in Spring 2016.

Even if the extra income is not needed, the lower rates of tax on dividends can be 'banked' with careful planning and the funds can then be taken from the company tax free at a later date when they are needed.

An individual with income of over £42,385 with surplus distributable reserves in their company could save £3,750 by drawing sufficient dividends to take their total income up to £100,000 before 6 April 2016 (See example 1).

An individual with income over £150,000 with surplus distributable reserves in their company could save over £10,000 by drawing sufficient dividends to take their total income up to £200,000 before 6 April 2016 (See example 2).

If the level of dividends is scaled up the savings available are ever larger (see example 3). An individual with sufficient reserves to take their income to £1,000,000 could save in excess of £71,000 by drawing the excess reserves as dividends before 6 April 2016.

If the surplus income is not needed the saving available by taking the dividends before 6 April 2016 can be 'banked'. The extra dividends drawn can be put straight back into the company creating a credit on the directors current account. This credit can then be drawn down on tax free (the excess dividends are taxable at the pre 6 April 2016 dividend rates when drawn). This means that the director can benefit from the saving and only take the funds out of the company again once they need them (see example 4).

Example 1
"I have income over £42,385 and have sufficient reserves in my company to take my total income to £100,000"

The additional dividends will be 'grossed up' and taxed at a rate of 32.5% with a deduction of a 10% notional tax credit. From 6 April 2016 the additional dividends would be taxed at 32.5% with no notional tax credit. The tax saving by taking the dividends before 6 April 2016 is £3,750.

Example 2
"I have income over £42,385 and have sufficient reserves in my company to take my total income to £200,000"

The additional dividends will be 'grossed up' and taxed at a rate of 32.5% and 37.5% with a deduction of a 10% notional tax credit.  From 6 April 2016 the additional dividends would be taxed at 32.5% and 38.1% with no notional tax credit. The tax saving by taking the dividends before 6 April 2016 is £10,717.

Example 3
"I have income over £150,000 and have sufficient reserves in my company to take my total income to £1,000,000"

The additional dividends will be 'grossed up' and taxed at a rate of 32.5% and 37.5% with a deduction of a 10% notional tax credit.  From 6 April 2016 the additional dividends would be taxed at 32.5% and 38.1% with no notional tax credit. The tax saving by taking the dividends before 6 April 2016 is £71,072.

Example 4
"I have income below £42,385 and have sufficient reserves in my company to take my total income to £42,385. I only require £11,000 of income to support my lifestyle"

The additional dividends to take total income to £42,385 does not give rise to any additional income tax liability. From 6 April 2016 the additional dividends would give rise to an income tax liability of £918. For a couple this would be £918 each so £1,836 in total.

If the extra dividends are taken and then the funds are paid straight back into the company the monies paid into the company will be credited to the director's loan account and the loan account can be drawn down on tax free when the director needs the funds.

Action

  • Consider the scope for paying dividends before 6 April 2016. Planning is key.
  • Those with significant income, where the dividend tax will make a big difference, should give serious consideration to the timing and quantum of dividend payments in Spring 2016. Pre-6 April 2016 dividends will be significantly more tax-efficient for these individuals.
  • Even if an individual does not need the excess income, the lower rates of tax on dividends can be 'banked' and the funds can then be taken as and when they are needed.
  • We can expect HMRC to closely examine the timing of dividends paid in March and April next year, so getting the paperwork right will be essential.

You may have already discussed the implications of the new dividend regime with your manager and have already put tax planning measures in place, but for those of you who are yet to consider the new rules please contact your manager at Butler and Co if you would like to discuss how we can work with you to achieve the best result for you.

We note that not all of the information provided here may apply directly to your own tax affairs. However if you have business contacts, friends or family members who may find this information useful please feel free to send this onto them.

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