Dividend Tax - An “interesting” opportunity
11th April 2016
With the introduction of the new 7.5% tax on dividends coming into effect from 6 April 2016, now is the time for the most tax efficient method of remuneration to be reconsidered.
Previously the most tax efficient method of remuneration was to pay a salary of circa £8,000 and dividends of £30,000, which kept you within the basic rate of tax and resulted in no personal tax liability.
From 6 April 2016 a salary of £8,000 per annum and dividends of £30,000 there would be a personal tax liability of £1,650 per annum.
In addition to the changes to tax on dividends, the government have announced the new Personal Savings Allowance, allowing basic rate tax payers to earn up to £1,000 of interest tax free. This allowance is on top of the £5,000 0% starting rate limit for savings income.
So, let’s assume a director currently has £50,000 in an ISA earning 1% interest (£500 per annum). The director could potentially lend this to the company for an interest rate of say 10% (£5,000 per annum). As a result, the director could reduce the dividends they draw by £5,000 and replace this with interest of £5,000. The director would save personal tax at 7.5% on the £5,000 (being £375) and the company would save corporation tax on the interest paid at 20% (being £1,000). This creates a net saving of £875 per annum, after deducting the £500 of interest you won’t receive on your ISA.
You must be able to justify that the company had a requirement to borrow the money and that the rate of interest charged is at market rate.
If you would like to discuss this or other potential methods for mitigating the effects of the dividend tax, please get in touch on 01273 701200 or email@example.com
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