Company dividends - are you ready for the changes?
From April 2016, the government will replace the current 10% notional tax on dividends with a £5,000 allowance. As a result, directors of small and medium sized businesses may find that paying a dividend is no longer the best way for them to extract profits from the company.
Salary, dividend or pension?
Taking a dividend instead of salary will still be preferable because you will save on national insurance. However, if you are a higher rate taxpayer, you will pay more tax than you do today on dividends above £21,600.
Under the new rules, the most tax efficient way for you to benefit from your business may be through an employer pension payment. As an example, taking £40,000 of gross profit from the business as pension will save a higher rate tax payer over £13,500 of tax compared to taking a salary, and over £10,000 compared to making a dividend payment.
Uniquely, pensions offer the best of both worlds. Like a dividend, employer's pension payments are free from national insurance. And like a salary, pensions are allowable deductions for corporation tax. While all directors can benefit financially from employer pension contributions, if you're aged 55 or over, taking part of your benefits as a pension contribution could enable you to sidestep these changes without even sacrificing access to your money.
The tax benefits for making a pension contribution haven't changed; it's just that the merits of taking dividends will diminish. You may even benefit by acting now rather than waiting until April.
The main rate of corporation tax is set to fall by 1% in April, so you will get higher corporation tax relief on any pension contributions that you make now. And because the annual allowance for high earners will fall to £10,000 and the 2015/16 pension input period (PIP) is changing, you may be able to take advantage of additional annual allowances if you act before April.
Of course, your individual circumstances will determine what is best for you. To discuss your options, please contact a member of our Chartered Financial Planning team.
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