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Dividend tax changes from 2016/17

Dividend tax changes from 2016/17

By Adrian Huston

Nasty extra dividend tax hits owners of small companies.

April 2016 sees the start of a new dividend tax regime which will affect the owners of most of the UK’s small limited companies. Many will be hundreds or thousands of pounds worse off.

Individual investors who own shares can also be affected, but only if their total dividends in the year exceed £5,000.  So that means a fairly small number of people.

The Chancellor George Osborne has introduced this new dividend tax to balance out the tax bills suffered by people who have the same income, but receive it in different ways.

My video at http://tinyurl.com/HustonTV52 explains the change, and read on for further details.

Take 3 categories of people:

  • Jenny runs her own limited company. It can make £50K per year and she can take a mix of salary and dividends.
  • Roger is a sole trader who makes profits of £50K per year.
  • Andrew is an employee and his salary is £50K.

Prior to April 2016 Jenny could arrange her dividend/salary mix to make a big saving, mainly on National Insurance Contributions (NIC)

If we worked out the 2015/16 total tax and National Insurance bills (including Jenny’s company tax) there would be widely varying bills, as follows:

  • Jenny’s percentage of the £50K taken in taxes could be as low as 18% (or up to 33% if she took all her money as salary, against the advice of her accountant.)
  • Self-employed Roger would lose some 25% of his profits in tax and NIC.
  • Andrew, the employee would lose 27%.

Why the changes for 2016/17 and beyond?

With previous governments having encouraged businesses to form up as limited companies, now the Chancellor has decided to take away one of the main advantages – the ability to juggle your salary and dividend split to save some money.  He wants self-employed and limited companies to have a more similar tax regime.  I do not need to get into the morality of the old or new approaches, I must merely warn those with large dividends about the new regime. Before I go into the detail, let’s see the effect of the changes in April 2017.

How do Jenny, Roger and Andrew fare in 2016/17?

  • Jenny’s best case split of salary and dividend raises her tax bills to about 21%, up from 18%. (If she took all salary there would be no change at 33%, but that would be daft.)
  • Roger, being self-employed, is unaffected at 25%.
  • Meanwhile employee Andrew is also unaffected at 27% to the government.

So we can see that the Chancellor’s measure is closing the gap in the tax regimes between someone being self-employed and choosing to set up their business as a limited company. Jenny faces a few thousand more in tax each year due to the dividend tax.

The 2015/16 dividend tax regime in summary

Up to 5 April 2016 dividends, to the basic rate taxpayer, were simply treated as if they had already been taxed.

Higher rate taxpayers paid extra tax on dividends – 25% of the net they received.

This meant that the owner of a small company could take out a salary of say £10,000 and dividends of say £28,000 and pay no tax and only minimal National Insurance.  The company would pay tax, but taken together the company and owner would be better off that if they had just been self-employed.

Working out if you were close to the limit to start paying higher-rate tax was confusing.  Net dividends you received had to be grossed up.  Every £90 of dividend was treated as £100 gross.  The gross dividends plus your other income dictated whether you had some higher rate tax to pay.

The 2016/17 measures in detail

Dividend income will no longer have any form of tax credit to confuse the sums.  What you get is regarded as the gross dividend.

If your dividends in the year are £5,000 or less there will be no income tax to pay. This £5,000 is called your Dividend Allowance.

More reading and some examples are on the HMRC website at https://www.gov.uk/government/publications/dividend-allowance-factsheet

If your dividends exceed £5K, then those dividends above the allowance will be taxed.

The tax rates will depend on whether your total income exceeds the basic rate threshold. (£43,000 in 2016/17)

  • The starting rate for dividend tax is 7.5% on dividends over £5,000.
  • Any dividends which push you into the higher rate threshold will be taxed at 32.5%.
  • People earning over £150,000 will have a dividend tax rate of 38.1%.

Tax planning points for those in business

If thinking about setting up a limited company, then the decision is much less clear-cut than it used to be. You might decide just to be a sole trader or some form of partnership.

Limited companies will still be attractive if you can make a lot of money but do not need to take it all out of the company each year. They will also still provide some protection from risking your house and savings if something goes wrong or the business is sued.

Advice on the best form to use for your business is now more important than ever.

If you already operate through your own limited company then look carefully at dividend levels, amount you need to take out, and pension contributions.

Tax planning points for people with high dividends but are not in business

This new tax makes it much more attractive to reduce your dividend income to under £5,000, and one way to do this is to move your shareholdings into an ISA.  Dividend income in an ISA is tax-free.

Ba careful of Capital Gains Tax if selling a lot of shares or ones which have risen well since you bought them.  If worried, then paying for a chat with a tax expert might be worthwhile.

In conclusion

Anyone who gets more than £5,000 in dividend income will be affected by this from 6 April 2016.  They need to know what tax they will owe, and how to declare the income to HMRC.  They also need to set some money aside to pay the bill when it arrives.

VIDEO: See also my video on this subject at http://tinyurl.com/HustonTV52

 

Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or 028 9080 6080.
Unpaid salary – what if your employer paid you too little? What to do.

Unpaid salary – what if your employer paid you too little? What to do.

By Adrian Huston

My net salary is wrong. Why? What can I do?

This is quite a common occurrence, and this article is inspired by a story of unpaid salary  Northern Ireland health service workers who in May 2014 were being paid less than they were due, or in some cases being paid twice! The unions NIPSA and Unison were understandably cheesed off with this issue – blamed on a new payroll system installed in October 2013. A 6 minute interview with a union official and me about this case is at http://youtu.be/Ri9SfcNVAE0

This article will tell you how to complain if you are paid the right amount, and how to take a case to an Industrial Tribunal or Employment Tribunal. Also the websites and phone numbers.

 

Why might your employer pay you too little or too much:

  • Their computer system is playing up (as above)
  • They are using the wrong tax code (or National Insurance code)
  • They have decided to deduct something from your pay – maybe for accommodation, or something you damaged
  • They worked out your pay wrongly

Let’s look at these scenarios in a little bit more depth, and consider your options.

Computer system playing up

These days it is very easy to blame computers for things going wrong, but of course it needs a human to be at the heart of the problem. That human might have designed the system poorly. Or they might work in payroll and have put the wrong information into the computer (and guess what comes out!)

One is much less sympathetic when the employer has hundreds or thousands of employees, because the assumption would be that they buy in a powerful payroll program or service which can cope with all eventualities. (More on this later.)

Using the wrong tax or National Insurance code

Lots of people are aware of tax codes, even if they don’t fully understand them. Fewer people are aware that there are different codes for National Insurance, and these too can make a big difference to your net pay. NI codes appear as letters, A, B etc. A is the standard one.

Your tax code tells your employer how much tax to take off you each pay-day. No amount of complaining to your wages department will get your tax code changed. They can only change the code on instruction from HMRC.

If you think your tax code is wrong then phone HMRC on 0300 200 3300. They are open 8 to 8 Monday to Friday and until 4 on a Saturday. Have your National Insurance number handy, and make sure to note down the name of the person you speak to, plus the date and time of the call.

If HMRC agrees that your employer is operating the wrong code they can issue one to work. It should then be used in the next payroll run. If not then talk to your wages department or to HMRC again.

Our son recently had an employer who operated the wrong tax code and even after HMRC issued correct ones, still failed to use them. It took a lot of pressure to get the thing sorted. Don’t give up!

National Insurance (NI) codes tell the wages department how much NI to take off your pay. A lot of people are on the same NI code and all will work smoothly. However if someone has more than one job, they can ask HMRC to issue a special NI code, and save themselves money.

On the National Insurance type of problems, my wife Felicity Huston worked part-time for the Northern Ireland civil service, as well as being a director of Huston & Co. She applied to HMRC and the correct, special NI code was issued to the civil service. They refused to operate it, potentially costing Felicity over a thousand pounds a year. Despite employing tens of thousands of staff, they claimed their payroll system was incapable of using this special NI code. Only by threatening taking a claim to an Industrial Tribunal (Employment Tribunal) did the civil service wake up and smell the coffee. Somehow they managed to do what HMRC was requiring of them.

Refusal of an employer to operate a tax or NI code is simply not an option. The law requires the employer to do as HMRC says.

If you are paid too much, then your employer is entitled to have their money back. If you have spent it before the problem came to light them your employer should be reasonable in how they ask you to repay it. They might, for example, seek your agreement to paying it back over a number of months.

Employer has deducted something from your pay

Sometimes your pay packet is light because your employer has deducted something else, apart from tax and National Insurance. This could be for:

  • Replacement uniforms
  • Damaged goods or equipment
  • Accommodation
  • Private phone calls on a company phone
  • Private purchases on a company card

The key tests here are firstly is the deduction correct and fair? Secondly is the employer entitled simply to deduct this from your pay? Check your contract or staff handbook.

If you think the deduction is wrong, or shouldn’t have been taken out of your pay, then you should raise this matter in writing with your employer, in the first instance. In unsatisfied with their response there needs to be an appeal, and then you can take the matter of unpaid salary to an Industrial Tribunal (or Employment Tribunal.) The claim you are making is that the employer has made an “unlawful deduction from wages.”

Employer has worked out your pay incorrectly – you have unpaid salary

This could be because you feel you have unpaid salary or wages as they haven’t

  • paid you for all your hours worked
  • paid overtime at the right rate
  • paid you less than an equivalent worker of a different sex
  • given you the sick pay you were entitled to

In each of these cases you need to put your concern in a letter to the employer, and if need be then appeal their decision. After that you are back to taking a case to an Industrial or Employment Tribunal.

Contacts for Industrial Tribunals / Employment Tribunals

Northern Ireland – http://www.employmenttribunalsni.co.uk 028 9032 7666

England & Wales – http://www.justice.gov.uk/tribunals/employment 030 0123 1024

Scotland – http://www.justice.gov.uk/tribunals/employment 014 1354 8574

 

At all of the stages of taking a complaint you could use your trade union or solicitor to help make your case, but of course the solicitor will need paid, the union will offer free advice, as will Citizens Advice.

   Adrian Huston is a former tax inspector, now director of Huston & Co Tax Consultants & Accountants.  www.huston.co.uk   028 9080 6080    @HustonTax

 

Tax codes explained – are you on the wrong tax code?

Tax codes explained – are you on the wrong tax code?

By Adrian Huston

Is my tax code wrong?

Tax codes dictate how much tax we lose from our wages and pensions. If they are wrong then the tax is wrong. If we don’t spot it then there is no guarantee that HMRC will! This is why understanding tax codes is important.
Unless your tax code begins with a K, or is BR or D0, then there is a simple rule of thumb. Most tax codes show your tax-free allowances, but divided by 10.
For example the standard tax-free Personal Allowance is £10,600. Divide this by 10 to get the tax code. Thus most people are on a code of 1060L.
Picture is an example tax code for 2015/16 for a 40% taxpayer who pays gift aid and personal pension contributions

HMRC tax code
Example tax code for 2015/16

Adjustments to tax codes
Sometimes HMRC will try to make adjustments to your tax code. This is normally a good thing. They are trying to have the correct amount of tax deducted from you over the year. In theory this should leave your tax correct at the year-end of 5 April.
Examples of adjustments made include:
• State pension or benefits expected
• Collect tax owed from an earlier year
• Rental profit estimated
• Company car – the taxable benefit
• Relief for professional subscriptions you pay
• Relief for gift aid payments (if you pay higher-rate tax)
• Higher-rate relief for pension contributions
So your tax code may have extra allowances added – to give you extra tax relief. Or it may have things deducted – HMRC’s way of taxing some income.
By far the most common adjustment is to reflect the state pension HMRC thinks you will get this year. State pension is taxable, though if that was all you earned it would be below the tax-free Personal Allowance. However if you have another source of income, and it is taxed at source, then HMRC will try to collect the tax due on both the pension and that other source, all from the same place. This can make it look like you are losing a lot of tax from your job or works pension. In fact you are losing the tax from two sources of income, but only having it taken off one!
What if I think my tax code needs changed?
You need to contact HMRC in one of two ways:
• Phone them on 0300 200 3300 (open 8-8 weekdays, 8-4 on Saturday)
• Write to them at HMRC, BX9 1AS. (Yes the address is that short.)
If you are nervous about phoning them then write to them. The answer may take longer, but at least the answer will be in writing. You will have time to study it. If phoning then write down the date of the call and who you speak to.
If you don’t understand part of what makes up your tax code – then ask for it to be explained. It is the tax official’s job to help you understand.
What happens if code is wrong and I do nothing?
Then your employer or pension provider will deduct the wrong amount of tax. Depending on the error, this may never be discovered by HMRC, and you could lose out.
Deferred state pension
HMRC is normally told how much state pension you will get. They use this to adjust your code. The adjustments are NORMALLY correct.
However I have seen some cases recently were people put off receiving their state pension for a few years. I found that HMRC was adjusting their tax code each year. In other words HMRC assumed they were getting the pension, and were taxing them too highly. One client was owed a tax refund of thousands.
Unusual codes
Here are the most common codes which are NOT simply 10% of your tax-free allowances after adjustments:
• BR – means deduct Basic Rate tax of 20%. Used for second jobs, extra pensions etc.
• D0 – means deduct 40% tax. Used for second jobs where the person pays higher-rate tax.
• K codes – mean the items deducted from the code are greater than the allowances, and you have a negative amount of tax-free allowances. The K code is roughly 10% of the negative allowances. These codes are most common with company cars or large state pensions.

In conclusion

• Tax codes dictate the amount of tax your employer deducts.
• They may be wrong, and the mistake can go undiscovered.
• If in doubt ask HMRC to check your tax code.

The author Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or 028 9080 6080.