Dividend Tax Allowance – A double hit?
HM Revenue & Customs are concerned that due to the change in the way dividends are to be taxed there is a greater incentive for individuals to arrange their tax affairs so that profit generated in a company can be taxed as capital as opposed to income.
Currently the highest rate of capital gains tax in the UK is 28%, however this could be as low as 10% with a successful claim for Entrepreneur's relief. However under the new rules, the highest rate of dividend tax is 37.5%.
Directors of a limited company who are also shareholders often have the ability to shelter profits within the limited company by choosing not to take them by way of salary or dividend. These profits will then continue to accumulate until a later date when the company could be sold to a third party or liquidated. In this situation, the profits of the company can effectively be turned into a capital gain which is likely to provide a tax advantage.
Therefore new legislation is set to be introduced which, provided the conditions are met, will allow HMRC to assess certain capital distributions as income. Although these rules are not finalised, it is expected they will take affect from 6 April 2016.
If you are a shareholder of a limited company with significant cash reserves then it is likely you will be affected by these new rules, particularly if you are looking to exit the business in the near future.
Please contact your local Perrys branch if you have any questions in relation to either announcement or would like to review your current remuneration structure.
Article written by Craig Harman