Newsletter October 2015

This month’s newsletter includes articles that highlight the following tax and business issues: salary v dividend changes, details of the personal savings allowance, changes to the advisory fuel rates, and details of emerging markets in the EU.

Our next newsletter will be published Thursday, 5 November 2015.

Salary v dividends conundrum

In the last two editions of this newsletter we have outlined the impact of the changes to the taxation of dividends that will commence 6 April 2016.

This month we want to continue to look at this major change as it affects the shareholder directors of private limited companies.

For 2015-16 any dividends drawn by shareholders that form part of their income taxed at the standard rate, will attract no personal tax on amounts taken. If the dividends form part of their income taxed at 40% or 45%, then the additional personal tax due is calculated as 32.5% or 37.5% respectively - of the gross dividend received – less the present 10% tax credit.

As previously discussed, from 6 April 2016, the way dividends are being taxed will change. The 10% tax credit is being abolished and each individual will have available a flat rate dividend allowance of £5,000. Any dividends received by an individual in excess of £5,000 will be taxed as follows:

• 7.5% if your dividend income is within the standard rate (20%) band
• 32.5% if your dividend income is within the higher rate (40%) band, and
• 38.1% if your dividend income is within the additional rate (45%) band

A director shareholder who presently receives a £27,000 net dividend as part of his remuneration package, and all of this income falls to be part of their standard rate band, then no additional tax is payable. With no change in strategy, for 2016-17 the same dividend will create an extra personal tax liability of £1,650.

This amount will usually form part of the director’s Self Assessment underpayment for 2016-17 and be due for payment 31 January 2018. On the same date the director will be required to make a payment on account for 2017-18; accordingly, the extra tax of £1,650 coverts into tax payable of £2,475 on 31 January 2018 (£1,650 plus 50% of this amount as payment on account for 2017-18), with a further 50% or £825 payable as a second payment on account 31 July 2018.

Should you compensate for this tax increase by increasing your salary? The answer would generally be no, as that would mean 12% employees’ NICs and 13.8% employers’ NICs. It may be possible to offset any additional employers’ NICs due by claiming the £2,000 Employment Allowance (£3000 from April 2016, but beware new restrictions from this date for “one-man” companies).
Unfortunately, in most, if not all cases, where dividend income is a significant part of your remuneration package, this change in legislation is likely to mean that you will pay more personal tax from April next year.

Interestingly, a higher rate tax payer receiving the same £27,000 cash dividend will only be £400 worse off.

It should also be noted that the £5,000 allowance is not an exception but a nil rate tax band. The full dividends still count as income e.g. for calculating the effect on personal tax allowances.

There are limited planning options, including changing the scale of dividends taken before 6 April 2016. Business owners need to plan for these tax increases and we recommend that you seek professional advice as soon as possible.

Personal Savings Allowance (PSA)

From April 2016, you won’t have to pay tax on interest received up to £1,000 (if you are a standard rate taxpayer), or £500 if you pay tax at the higher rate.

Therefore, to be eligible for this new allowance in 2016-17:

• Your taxable income needs to be less than £42,700 a year to qualify for the £1,000 PSA, or,
• Your income needs to be between £42,701 and £150,000 to qualify for the £500 PSA.

To facilitate this change, from April 2016 banks and building societies will stop automatically taking the 20% Income Tax from the interest earned on your non-ISA savings accounts.

Readers who receive substantial interest on their non-ISA savings should take this latter fact into account. For 2016-17 their investment income could create an increase in underpayments in their tax position as they will receive their interest gross, no tax deducted. For example, there will be those who haven’t had to pay tax to HMRC because all their income was taxed at source. This group may be required to pay their tax separately in future.

This could particularly affect certain pensioners and the like benefitting from the £5000 nil “savings rate” of tax applying for 2015-16 only.

Advisory fuel rates from 1 September 2015

Changes to these rates from 1 September 2015 are:

• Petrol: engine size 1400cc or less – 11p per mile
• Petrol: engine size 1401cc to 2000cc – 14p per mile
• Petrol: engine size over 2000cc – 21p per mile
• LPG: engine size 1400cc or less – 7p per mile
• LPG: engine size 1401cc to 2000cc – 9p per mile
• LPG: engine size over 2000cc – 14p per mile
• Diesel: engine size 1600cc or less – 9p per mile
• Diesel: engine size 1601cc to 2000cc – 11p per mile
• Diesel: engine size over 2000cc – 13p per mile

These rates can be used to calculate the recovery of VAT input tax on the cost to a business of mileage payments made to employees, or to calculate the amount an employee needs to reimburse an employer for the private fuel used by a company car.

Emerging markets in the EU?

If you are considering, or already are, selling your products and services in the EU, you may want to read the following recent announcement published on the UK government website.

“Emerging Europe offers opportunities for all UK companies ranging from novice to experienced exporters, and across multiple sectors.

Emerging Europe is made up of 11 markets and over 120 million consumers located in Central and Eastern Europe (CEE).

This region offers:

• increasingly affluent consumers
• economic growth at double the rate of western Europe
• widespread use of the English language
• low risk compared with other Emerging Markets further from the UK
• easy accessibility from the UK – just 2 to 3 hours flying time on low cost airlines

UK exports are worth over £16 billion, with goods exports doubling over the past decade, and services exports - over £4 billion - trebling.

What is Emerging Europe?

Markets of Emerging Europe are at differing stages of development, but all offer long-term growth prospects for UK companies. The markets are:

• Austria
• Bosnia and Herzegovina
• Bulgaria
• Croatia
• Czech Republic
• Hungary
• Poland
• Romania
• Serbia
• Slovakia
• Slovenia

Benefits of doing business in Emerging Europe

The markets offer UK companies a number of advantages including:

• ease of developing business relationships as located close to UK with access via large number of budget airlines
• ideal for Small and Medium Enterprises (SMEs) on tight budgets
• supply chain opportunities in support of strategically important industries
• opportunities resulting from £170 billion European Union (EU) Structural and Cohesion funds for 2014 to 2020
• UK’s positive image as a reliable business partner and increasingly as a source of innovative products and services and new technology

Opportunities

There are opportunities across a range of sectors. These include:

• advanced manufacturing
• defence and security
• energy
• healthcare and life sciences
• infrastructure
• services (financial and professional services, e-commerce and traditional retail)”

Tax Diary October/November 2015

1 October 2015 - Due date for Corporation Tax due for the year ended 31 December 2014.

19 October 2015 - PAYE and NIC deductions due for month ended 5 October 2015. (If you pay your tax electronically the due date is 22 October 2015.)

19 October 2015 - Filing deadline for the CIS300 monthly return for the month ended 5 October 2015.

19 October 2015 - CIS tax deducted for the month ended 5 October 2015 is payable by today.

31 October 2015 – Latest date you can file a paper version of your 2015 Self Assessment tax return.

1 November 2015 - Due date for Corporation Tax due for the year ended 31 January 2015.

19 November 2015 - PAYE and NIC deductions due for month ended 5 November 2015. (If you pay your tax electronically the due date is 22 November 2015.)

19 November 2015 - Filing deadline for the CIS300 monthly return for the month ended 5 November 2015.

19 November 2015 - CIS tax deducted for the month ended 5 November 2015 is payable by today.