Dividends? All change...

So, in this month's emergency budget the Chancellor announced the biggest shake up of tax on investment in over a generation. No longer will dividend income for basic rate taxpayers be, in effect, tax free. The 10% notional tax credit that almost all of us have always accepted as a slightly odd anomaly of the tax code is no more, well from next April at least! So, what exactly  does this all mean and how does it affect you, me and all the millions of business owners and investors in the UK?

Well, first of all we have a new £5,000 dividend allowance, which in effect means the first £5,000 of dividend income you receive (be that from your business, or your portfolio) will still be tax free. However, anything over and above that will be subject to 7.5% tax at the basic rate, 32.5% at the higher rate and 37.5% for additional rate taxpayers. As with most changes to the system of taxes in the UK there are various winners and losers as a result.

The is also in addition to the £1,000 savings, or interest allowance that was announced last year. All of which points to government wanting to encourage the small investor in a move away from cash to bolster the financial markets. Well, that is my opinion at least, given that what we are seeing is in effect a tax break for investing in the equities market.


It is possible that investors who have built up sizeable portfolios could be subject to the higher rate. For example, a share portfolio of £125,000 with a yield of 4 per cent will generate £5,000 income a year and use up the dividend allowance. So, we are not talking about something that will affect only the "super-rich" here.

Similarly, for owners of small businesses who have for many a year sought to save tax my taking their remuneration out of their companies as dividend we will see a huge change. Whilst large companies will still be more tax efficient under the new system (although not as efficient as they once were), smaller family businesses may find themselves facing larger tax bills as a corporate entity and the prospect of dis-incorporation looms as a partnership may once again mean paying tax.


So, enough of the doom and gloom, what are the advantages and what can you do to iron out some of the knottier problems:

Maximise your annual tax-free dividend allowance
Each person will be entitled to a new tax-free Dividend Allowance of £5,000 per annum. Married couples (and registered civil partners) should spread their taxable portfolios between them to make full use of each person's allowance.

Make the most of each spouse's income tax allowance and tax bands
It sounds obvious, but married couples should still seek to make full use of their personal allowances and basic rate tax bands, where applicable, so that taxable dividends are paid in the name of the spouse who pays the lowest tax rates.

Defer taxation using an investment bond
Dividend income within an investment bond grows almost free of taxation. Investors only pay tax when profits are withdrawn from the bond, and even then withdrawals of up to 5 per cent of the original capital per year (cumulative) can be taken without an immediate tax charge.

Don't forget your ISA
Taxpayers will see a tax increase of 7.5 per cent on dividend income received above £5,000 a year. This makes sheltering taxable investments in an ISA all the more important as unlimited dividends can be withdrawn from an ISA tax-free.  There is also no capital gains tax to pay in an ISA. Up to £15,240 worth of existing investments can be sheltered in the current tax year.

So what about business owners?
Well, at present the picture is far from rosy, and although the "tax scheme industry" has already rolled up its sleeves to come up with a cunning plan I fear it will end as most of Baldrick's did in disaster for the participants. That said, this is not all bad news, the current system of taxation on dividends has always seemed a bit odd when compared to the rest of the tax code, and for the vast majority will still be preferential to taking a salary. Unfortunately, it really is only those on the fringes of this argument who will see a genuine negative effect and as I've already said dis-incorporation might be attractive, there is after all a £100,000 relief available after all!

Budget 2015: Tax Credits Changes

As was predicted ahead of yesterday's speech by the Chancellor, we will be seeing big changes to the current system of tax credits.

Going forward, only the very  lowest-income families will be able to claim tax credits. Along with the changes to entitlement to under the new Universal Credit, this is heralded to cut around £2.9bn from the welfare bill over the course of the next financial year and then an additional £3.4bn a year by 2020-21 with the income threshold for tax credits is to be reduced from £6,420 to £3,850.

Larger families in particular will be hit by the proposed tax credit changes if they have more children from April 2017 onwards with the possible restriction of only receiving benefit for the first two children. Claimants will see child tax credits and Universal Credit limited to the first two children, although mention was made of extenuating circumstance which we can only assume will ocver multiple birth situations.

To put this into context: at present around 870,000 families claiming tax credits have three or more children - this is representative  of about one in five families who receiving tax credit. However, it will only be those larger families making a claim, or having more children, from April 2017 that will be affected. If families of three or more children already have a claim in place prior to April 2017 it will continue to be honoured. So for those currently in that position it is increasingly important to make that claim now rather than delay it!

In addition to this we are also seeing changes to many working age benefits, with some being frozen for four years, such as tax credits and local housing allowance, but excluding maternity pay and disability benefits. This is a further cut to the welfare bill of £4bn a year by 2020-21. The benefits cap - the maximum amount a household can receive in benefits - will also be reduced as a result of yesterday's announcements. For those living outside of London it will drop down to £20,000. For those living in London, where housing costs are higher, the cap will be set at  £23,000.

All in all a wide ranging shake-up of the welfare system, and one that will see those in the "middle" lose out most, more noticeable of course where they have been reliant on those monies generated by  tax credits claims historically. What the Chancellor gives with one hand on the "Living Wage" and personal allowance, he takes away with another...

Budget 2015: Key Points

George Osborne has delivered his seventh Budget as chancellor, the first for a majority Conservative government since November 1996.

The main tax announcements are summarised as follows:

Personal taxation

• A new national living wage will be introduced for all workers aged over 25, starting at £7.20 an hour from April 2016 and set to reach £9 by 2020 - giving an estimated 2.5 million people an average £5,000 rise over five years.
• The inheritance tax threshold will increase to £1m, phased in from 2017 and underpinned by a new family home allowance.
• The personal allowance, at which people start paying tax, rises to £11,000 next year. The government says the personal allowance will rise to £12,500 by 2020, so that people working 30 hours a week on the minimum wage do not pay income tax. Also, the point at which people start paying income tax at the 40p rate to rise from £42,385 to £43,000 next year, going up to £50,000 by the end of this parliament.
• However, on the downside, mortgage interest relief is to be restricted to basic rate of income tax for property investors.

Business taxation

• Corporation tax is to be cut again to 19% in 2017 and 18% in 2020.
• Permanent non-dom status is to be abolished. This means that with effect from April 2017, anyone who has lived in the UK for 15 of the past 20 years will pay same level of tax as other UK citizens, raising an estimated £1.5bn.
• A further £7.2bn is to be raised from a clampdown on tax avoidance and tax evasion with HMRC's budget for this being increased by £750m.
• The bank levy rate is to be gradually reduced over the next six years and a new surcharge on bank profits will be introduced from 2016.
• National Insurance employment allowance for small firms will be increased by 50% to £3,000 from 2016.
• Dividend tax credit is to be replaced with a new tax-free allowance of £5,000 on dividend income. Rates of dividend tax will then be set at 7.5%, 32.5% and 38.1%.

Opinion

All in all not a bad budget from the chancellor, with many more "giveaways" than had been mooted in the media ahead of his speech. Certainly the further cut to the rates of corporation tax came as a shock to many, although it will be welcomed. Another interesting change was the restriction of mortgage interest rate relief for buy-to-let investors. Surely these two changes will see investors seeking to undertake their property activities through a corporate structure now rather than personally?

As ever, the devil is in the detail and over the coming days I will be very interested to pore over the draft legislation coming out of HM Treasury, as you can always guarantee that there will be more than a few provisions, especially anti-avoidance measures, hidden in the small print. Watch this space...