Originally introduced in 2014, the national insurance contributions ( NICs )employment allowance is for the purpose of supporting businesses and charities in helping them to grow by cutting the cost of employment.
According to HMRC statistics over a million employers have benefited since its introduction, however limited companies with a sole director as the only employee are no longer able to claim this allowance.To find out if your business is eligible, or to ensure your systems are set up correctly to accommodate this change and find out about any other employment allowance changes please contact the team here at Stem Outsource
Rules prior to 6 April 2016
Prior to 6 April 2016, the taxation of dividends had been made complicated due to a 10% tax credit being added to the cash amount of the dividend, with the tax credit then satisfying all or part of the income tax liability on the dividend.
The practical effect of the system is that basic rate taxpayers have no further tax to pay on dividend income and a higher rate taxpayer pays an effective 25% on the cash amount of the dividend receipt. However, from 6 April 2016 this tax credit will cease, and dividend income will be taxed at new tax rates.
Changes from April 2016
A new Dividend Allowance of £5,000 per annum is being introduced from the 2016/17 tax year. This is in addition to an individual's personal allowance. The Dividend Allowance does not change the amount of income that is brought into the income tax computation. Instead it charges £5,000 of the dividend income at 0% tax – the dividend nil rate. This means that:
Headline rates of dividend tax are also changing. From 6 April 2016 the rates of tax on dividends over £5,000 will be:
The Dividend Allowance will not reduce total income for tax purposes, and dividends within the allowance will still count towards the appropriate basic or higher rate bands. They may therefore affect the rate of tax payable on dividends received in excess of the £5,000 allowance. If your dividend income moves you from one tax band to another, then you will pay the higher dividend rate on that amount.
Here is an example showing the taxable amounts after allocating the relevant allowances to the two types of income.
|Non-dividend income (£)||Dividend income (£)|
|Taxable at basic rate||7,000 (20%)||17,000 (7.5%)|
As total income is £40,000 and the amount at which higher rate tax starts to apply is £43,000, the dividend income above £5,000 is taxed at 7.5%.
This example is more complicated. Total income is £49,000 and thus some income falls into the higher rate band. Dividends are treated as being the top slice of income. The Dividend Allowance is split into two – £3,000 to use up the balance of the basic rate band and £2,000 to 'eat into' the higher rate band.
|Non-dividend income (£)||Dividend income (£)|
|Dividend Allowance to basic rate limit||-||3,000|
|Dividend Allowance higher rate band||-||2,000|
|Taxable at basic rate||29,000 (20%)||-|
|Taxable at higher rate||-||4,000 (32.5%)|
Depending on the overall income and dividends you expect to receive, the new rules may have a greater or lesser impact on your finances. However, investors with modest income from shares are likely to see either a tax cut or no change in the amount of tax owing.
The following table shows a comparison between the tax rates prior to and post-6 April 2016.
|Basic rate band||Higher rate band||Additional rate band|
|Effective dividend tax rate prior to 6 April 2016||0%||25%||30.6%|
|Rate from 6 April 2016||7.5%||32.5%||38.1%|
An example of a winner might be a higher rate taxpayer who has dividend income of £5,000.
In the 2015/16 tax year he will have a tax liability of £1,250 (25% of £5,000). However, in 2016/17 he will have no tax liability.
An example of a loser under the new rules might be the sole shareholder of a company who takes a small salary and then dividends up to the threshold at which higher rate tax is payable. Assuming the salary is below the Personal Allowance, there will be no income tax to pay on the salary and no tax on the dividend. However, in 2016/17 only £5,000 of the dividends will escape tax.
To discover how the changes will affect you, please contact us for advice tailored to your particular circumstances.
Here we explore a few of the areas where it might be possible to save tax and thereby minimise the impact of the changes. Please note, this is intended as general guidance only and you are advised to seek expert help before taking action.
Maximising the Dividend Allowance
Under the new system, every individual will be entitled to a tax-free Dividend Allowance of £5,000 per annum. Married couples and civil partners might therefore want to consider spreading their investment portfolios in order to utilise each person's Dividend Allowance.
Trading as a limited company
If you currently trade as a limited company you may think that it will be preferable to trade as a sole trader or as a partnership from 6 April 2016. However, in many cases, continuing to trade as a limited company will still offer benefits in tax terms. The tax saved by incorporation compared to being unincorporated will be reduced, but there is still an annual tax saving.
Salary or dividend?
Historically, it has been favourable for a director-shareholder to take dividends rather than a salary. This is because a dividend is paid free of national insurance contributions, whilst a salary or bonus can carry up to 25.8% in combined employer and employee contributions. However, a salary or bonus is generally tax deductible for the company, whereas dividends are not.
So will it still be beneficial to take a dividend over a salary/bonus after the new rules come into effect? In fact, there may still be benefits for a director-shareholder taking a dividend over a salary, although the amount of tax saved will be reduced. Please ask us for further details.
Increasing dividends before 6 April
If you do not currently extract all the company profits as a dividend you may wish to consider increasing dividends before 6 April 2016. However, there may be other tax issues to consider, such as loss of the personal tax allowance if your total 'adjusted net income' exceeds £100,000. There will also be non-tax issues such as the availability of funds or profits in the company to pay the dividend.
Develop a tax-efficient savings strategy
Wherever possible, be sure to make the most of your tax-efficient savings and pension options. Despite interest rates being relatively low in recent years, Individual Savings Accounts (ISAs) can still be a useful tax-free savings vehicle. Individuals can invest in any combination of cash or stocks and shares up to the overall annual subscription limit of £15,240 in 2015/16. This limit will remain unchanged for the 2016/17 tax year. However, a saver may only pay into a maximum of one Cash ISA and one Stocks and Shares ISA each year.
You might also want to consider other tax-efficient investments such as Venture Capital Trusts (VCTs), which can generate tax-free dividends. If you have income from employment or self-employment you may also effectively reduce your marginal rate of tax on dividends by increasing pension contributions and taking advantage of the available tax relief – please ask us for further details.
Please note that this factsheet is for general guidance only. However, planning at this stage can help to save you money in the future, so please contact us for further assistance.
DISCLAIMER: This newsletter is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.If you require any further information please contact the team here at Stem Outsource
The government had concluded that companies will not be required to have an audit for the financial years commencing on or after 1 January 2016 if at their balance sheet date, they satisfy at least two out three criteria, in general for two consecutive financial years.
The criteria are a turnover of under £10.2m, a balance sheet total of £5.1m or less, and fewer than 50 employees.
The statement said that estimates suggest raising the audit exemption thresholds will bring a further 7,400 companies within scope of the exemption, but said the government anticipates that 4,400 will choose to continue to have an external audit.
Gordon Gruppetta, Director said 'There are many reasons why our audit exempt companies choose to have an audit - to give shareholders confidence, satisfy tender requirements, and ensure reliable financial reporting. Even though more businesses are now potentially exempt we expect many will continue to choose to have an audit.'If you require any further information please contact the team here at Stem Outsource
We are looking to recruit a highly motivated and enthusiastic individual to join our dynamic and progressive team to assist with the preparation of management accounts to our ever growing number of clients. Ideally with a minimum of 2 years' experience in industry or in practice, the candidate will over a short period of time be expected to look after their own portfolio of clients providing effective and timely management information. Experience in using multiple accounting software will be considered to be an asset. This opportunity will give the successful candidate exposure to a wide range of business sizes and structures in a variety of sectors with great prospects of developing and growing their career.
To apply please send full details of career to date and your CV. To firstname.lastname@example.org addressed to HR dept.
From April 2016, the government will introduce a new mandatory National Living Wage (NLW) for workers aged 25 and above, initially set at £7.20 – a rise of 50p relative to the current National Minimum Wage (NMW) rate. That's a £910 per annum increase in earnings for a full-time worker on the current NMW.
The adult NMW rate is currently £6.70. From 1 April 2016 the premium will come into effect on top of the NMW, taking the National Living Wage to £7.20. The NMW will continue to apply for those aged 21 to 24, with the premium added on top for those aged 25 and over, taking the total hourly rate to the National Living Wage.If you require any further information please contact the team here at Stem Outsource
Keeping adequate business records plays a key role in effectively monitoring the performance of your business, as well as ensuring that you comply with the requirements of HM Revenue & Customs (HMRC).
What are 'adequate records'?
Legislation requires businesses to keep all such records as may be required for the purposes of making a complete and accurate tax return. While the exact records required will depend on the nature of your business, at the very minimum it will entail keeping a record of all money travelling 'in' and 'out' of the business. All businesses will need to keep records of sales and takings, purchases and expenses including wage roll and payments to contractors plus copies of agreements/contracts with employees and freelancers if requested.
How long do I keep them for?
Legislation and HMRC's advice on how long you need to keep business records for varies depending on whether they are for VAT or other tax purposes.
As a general rule of thumb though, work on the basis that you need to keep records for six years. This is as far back as HMRC will generally go unless they suspect some deliberate wrongdoing has taken place.For more information please contact the team here at Stem Outsource
This is a " fast " moving issue ( forgive the pun ) with rules and regulations changing frequently and manufacturers developing new technology at a similar if not quicker rate, it is therefore worth looking at some of the ways you can keep the tax charge down to a minimum.
Zero and low Emission Cars
The taxable benefit is calculated as a percentage of the list price of the car, on the day before it was first registered, plus certain accessories. This percentage depends upon the rate at which the car emits carbon dioxide (CO2), and the fuel type.
From April 2015, the five year exemption for zero carbon and the lower rate for ultra-low carbon emission cars will come to an end. Two new bands will be introduced for ultra-low emission vehicles (ULEVs). These will be set at 0-50 g/km and 51-75 g/km. The appropriate percentages for the remaining bands will increase by 2% for cars emitting more than 75 g/km, to a new maximum of 37%.
Qualifying Low Emission Cars
Known as QUALECs, for 2013-14 and 2014-15 these are cars with CO2 emissions between 1g/km and 75 g/km inclusive. For diesel cars, the benefit in kind percentage in these years is 8%. For all other types of car (including diesel hybrids) the percentage is 5%. Cars in this range include the Toyota Prius Plug-In Hybrid, the Chevrolet Volt and even the Porsche Panamera S E-Hybrid.
Manufacturers are continually improving emissions across the whole range including luxury and performance vehicles.
Double Cab Pick-Ups
Becoming more and more popular Double cab or "king cab" pick-up trucks can provide a tax efficient alternative to having the more main stream company car.
Many of the "new breed " pick- ups are less agricultural than their predecessors and may provide a practical solution.
Provided they have a payload of 1,000kg or more, HMRC will usually accept these as being commercial vehicles rather than cars. So the benefit in kind charge is the flat rate van benefit figure of £3,000 per year, with an additional charge for private fuel of £564. For a higher rate taxpayer this would give a tax charge of £1,425 per year, less than £30 per week.
The benefit in kind and fuel benefit charges for company cars are calculated on the basis of the car's list price when it was new. If you choose a car that was first registered more than 15 years ago, and its current market value is below £15,000 you can still use the list price to calculate your benefit in kind.
As vehicles of this age are unlikely to have CO2 emissions figures, the percentage of the list price used to work out the benefit is based on engine capacity. The maximum percentage is 35% . Private fuel is based on a fixed figure rather than list price, so you would need to pay for your own fuel to avoid excessive benefit in kind charges.As you can see this is a slightly " fluid " issue and should you require further details or help and advice with your fleet arrangements from a taxation point of view please do not hesitate to contact the team here at Stem Outsource.