Dividends – Debonair Management Services Limited

Autumn Budget 2018 – Personal Tax

October 30, 2018 Debonair Management Services Limted

The personal allowance

The personal allowance is currently £11,850. The personal allowance for 2019/20 will be £12,500.

There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 and the threshold has remained at this figure since its introduction for the 2010/11 tax year. The reduction is £1 for every £2 of income above £100,000. So for 2018/19 there is no personal allowance where adjusted net income exceeds £123,700. For 2019/20 there will be no personal allowance available where adjusted net income exceeds £125,000.

The marriage allowance

The marriage allowance permits certain couples, where neither pays tax at more than the basic rate, to transfer 10% of their personal allowance to their spouse or civil partner.

The marriage allowance reduces the recipient’s tax bill by up to £238 a year in 2018/19. The marriage allowance was first introduced for 2015/16 and there are many couples who are entitled to claim but have not yet done so. It is possible to claim for all years back to 2015/16 where the entitlement conditions are met. A recent change to the law allows backdated claims to be made by personal representatives of a deceased transferor spouse or civil partner.

Tax bands and rates

The basic rate of tax is currently 20%. The band of income taxable at this rate is £34,500 so that the threshold at which the 40% band applies is £46,350 for those who are entitled to the full personal allowance. Additional rate taxpayers pay tax at 45% on their income in excess of £150,000.

The tax on income (other than savings and dividend income) is different for taxpayers who are resident in Scotland to taxpayers resident elsewhere in the UK. The Scottish income tax rates and bands apply to income such as employment income, self-employed trade profits and property income.

In the 2018/19 Scottish Budget, the Finance Secretary for Scotland introduced five income tax rates. The income tax rates range between 19% and 46%. Scottish taxpayers are entitled to the same personal allowance as individuals in the rest of the UK.

Tax bands and rates 2019/20

The government has announced that for 2019/20 the basic rate band will be increased to £37,500 so that the threshold at which the 40% band applies is £50,000 for those who are entitled to the full personal allowance. The additional rate of tax of 45% remains payable on taxable income above £150,000.

From April 2019, the Welsh Government has the right to vary the rates of income tax payable by Welsh taxpayers. The UK government will reduce each of the three rates of income tax paid by Welsh taxpayers by 10 pence. The Welsh Government has provisionally set the Welsh rate of income tax at 10 pence which will be added to the reduced UK rates. This means the rates of income tax paid by Welsh taxpayers will continue to be the same as those paid by English and Northern Irish taxpayers. The Welsh Government will need to confirm this proposal prior to their final Budget.

The Scottish Government will announce the Scottish income tax rates and bands for 2019/20 in the Draft Budget on 12 December 2018.

Tax on dividends

In 2018/19 the first £2,000 of dividends are chargeable to tax at 0% (the Dividend Allowance). The Dividend Allowance will remain at £2,000 for 2019/20. Dividends received above the allowance are taxed at the following rates:

7.5% for basic rate taxpayers
32.5% for higher rate taxpayers
38.1% for additional rate taxpayers.

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.

To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.

In 2017/18 the Dividend Allowance was £5,000. The reduction in the allowance particularly affects family company director-shareholders who extract monies from the company by means of a small salary and the balance in dividends. The cost of the restriction in the allowance for basic rate taxpayers is £225 increasing to £975 for higher rate taxpayers and £1,143 for additional rate taxpayers.

Tax on savings income

Savings income is income such as bank and building society interest.

The Savings Allowance, which was first introduced for the 2016/17 tax year, applies to savings income and the available allowance in a tax year depends on the individual’s marginal rate of income tax. Broadly, individuals taxed at up to the basic rate of tax have an allowance of £1,000. For higher rate taxpayers the allowance is £500. No allowance is due to additional rate taxpayers.

Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income less allocated allowances and reliefs) exceeds £5,000.

Rent-a-room relief

Rent-a-room relief gives relief from income tax for up to £7,500 of income to individuals who let furnished accommodation in their only or main residence. Following consultation on the draft legislation and to maintain the simplicity of the system, the government will not include legislation for the shared occupancy test. The government will retain the existing qualifying test of letting in a main or only residence.

Gift Aid – donor benefits

Draft legislation has been issued which simplifies the donor benefits rules that apply to charities who claim Gift Aid tax relief on donations. From 6 April 2019 the benefit threshold for the first £100 of the donation will remain at 25% of that amount. For gifts exceeding £100, charities can offer benefits up to the sum of £25 and 5% of the amount of the donation that exceeds £100. The total value of the benefit that a donor can receive remains at £2,500.

Gift Aid Small Donations Scheme

The Gift Aid Small Donations Scheme (GASDS) applies to small charitable donations where it is impractical to obtain a Gift Aid declaration. GASDS currently applies to donations of £20 or less made by individuals in cash or contactless payment. The limit will be raised to £30 from 6 April 2019.

National Living Wage (NLW) and National Minimum Wage (NMW)

Following the recommendations of the independent Low Pay Commission (LPC), the government will increase the NLW by 4.9% from £7.83 to £8.21 from April 2019.

The government will also accept all of the LPC’s recommendations for the other NMW rates to apply from April 2019, including increasing the rates for:

21 to 24 year olds by 4.3% from £7.38 to £7.70 per hour
18 to 20 year olds by 4.2% from £5.90 to £6.15 per hour
16 to 17 year olds by 3.6% from £4.20 to £4.35 per hour
apprentices by 5.4% from £3.70 to £3.90 per hour.

Universal Credit

The government has announced that the amount that households with children and people with disabilities can earn before their Universal Credit award begins to be withdrawn – the Work Allowance – will be increased by £1,000 from April 2019.

In addition the government has listened to representations made by stakeholders on Universal Credit, and has announced a package of extra support for claimants as they make the transition to Universal Credit.

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Dividend waiver: what you need to know

September 10, 2018September 12, 2018 Debonair Management Services Limted

Why waive your right to a dividend?

There are various reasons why shareholders may wish to create a dividend waiver:

It may be that a founder is no longer active on a day-to-day basis with the company but doesn’t want to relinquish their stake in the company completely by selling their shares. In this case the founder shareholder may opt to waive their right to a dividend when profits are distributed amongst shareholders
Alternatively, a family company may wish to share some of its profits with family members whilst retaining the remaining profit in the company to fund further growth. In this case the parents may waive their dividend while paying dividends to their children

Deed of waiver form

If you or your shareholders need to waive dividends, then there is a process to follow to ensure that the correct records are kept:

For final dividends, the waiver must be in place BEFORE the right to receive a dividend arises. For interim dividends then it must be in place before the dividend is paid.
A Deed of Waiver is required for all shareholders waiving their dividend. This needs to be signed by the shareholder, witnessed and returned to the company
The waiver may be for a set period or may be open ended

The HMRC view

Care must be taken that there are sound commercial reasons for waiving a dividend. If HMRC suspect that a dividend waiver may be being used for the avoidance of tax, then they are likely to take an interest.

Dividend payments are taxed at a lower rate than employment income due to national insurance contributions not being payable. The directors of a company may opt to reward their staff through payment of a dividend but waive their own dividend to increase the size of the dividend pot. If HMRC consider that the dividend payment is being made in lieu of salary, then they may take the view that the dividend should be taxed at the employment rate.

HMRC may test the dividends arrangement against the settlements legislation. HMRC state that the settlements legislation is likely to apply if:

The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital.
Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.
There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver.
The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver.
The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.

There are legal precedents where companies owned by married couples have used a dividend waiver to pay the party who is in a lower tax band a greater proportion of the profits. For example, Mr and Mrs Smith operate a property management business. Mrs Smith holds 80 shares and Mr Smith 20. Mrs Smith waives her right to any dividend. Having made a profit of £3,000 they decide to pay a dividend of £100 per share and Mr Smith receives a dividend of £2,000.

In this example HMRC are likely to use the Settlements legislation to challenge the payment as;

The company would be unable to pay the same rate of dividend to all shareholders if Mrs Smith had not waived her right to the dividend
Mr Smith the “non-waiving” shareholder is someone who Mrs Smith would wish to benefit from the waiver
Mr Smith is in a lower tax band than Mrs Smith and therefore would pay less tax than the waiving shareholder

A company may feel that rather than waiving dividends, an alternative approach would be to issue two share classes with different rights, one eligible to receive dividends and one not. However, this arrangement also risks being challenged by HMRC if the company’s retained profits were not enough to pay the dividend against all issued shares across the share classes.

To make sure that your dividend waiver does not draw the attention of HMRC, ensure that:

The dividend waiver is being made for a real business benefit and record this as part of the Deed of Waiver
The waived funds are retained by the company and not simply divided up between the shareholders who are receiving the dividend
The shareholder who is waiving their right to a dividend would be satisfied with the arrangement if the other shareholders were unrelated third parties (i.e. not people who the waiving shareholder would particularly wish to benefit)

Issuing dividends with dividend waivers

When creating dividend vouchers, Inform Direct makes it easy to identify shareholders who have signed a waiver. The system allows you to identify which shareholders have waived their dividend and whether this is for all the shares that they hold or just a proportion of them.

Download Deed of Waiver Template

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Dividends and Interest

May 30, 2018May 30, 2018 Debonair Management Services Limted

Dividend income

When dividends are received by an individual the amount received is the gross amount subject to tax. The availability of the Dividend Allowance (DA), introduced from 2016/17 onwards, means that the first £5,000 of dividends are charged to tax at 0%. Dividends received above this allowance are taxed at the following rates:

7.5% for basic rate taxpayers
32.5% for higher rate taxpayers
38.1% for additional rate taxpayers.

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the £5,000 allowance.

Dividends are treated as the top slice of income and the basic rate tax band is first allocated against other income.

It was announced in Budget 2017 that the DA will be reduced to £2,000 from 6 April 2018.

Example
Mr A has non-dividend income of £41,000 and receives dividends of £9,000. The non-dividend income is taxed first. Of the £41,000 non-dividend income, £11,500 is covered by the Personal Allowance, leaving £29,500 to be taxed at the basic rate.

The basic rate band for 2017/18 is £33,500 so this leaves £4,000 of dividend income that is within the basic rate limit before the higher rate threshold is crossed. The DA covers the £4,000, leaving £1,000 of the DA to be used for the dividends in the higher rate band.

The remaining £4,000 of dividends fall in the higher rate tax band and are therefore taxed at 32.5%.
Savings income
Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However this rate is not available if non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.

The Savings Allowance (SA), available from 2016/17 onwards, taxes savings income within the SA at 0%. The amount of SA depends on the individual’s marginal rate of tax. An individual taxed at the basic rate of tax has an SA of £1,000 whereas a higher rate taxpayer is entitled to a SA of £500. Additional rate taxpayers receive no SA.

Savings income includes:

interest on bank and building society accounts
interest on accounts with credit unions or National Savings and Investments
interest distributions from authorised unit trusts, open-ended investment companies (OEICs) and investment trusts
income from government or corporate bonds
most types of purchased life annuity payments.
Is savings income received net or gross of tax?
This is much more complicated than you may think. The government has removed the requirement (from 6 April 2016) for banks and building societies to deduct tax from account interest they pay to customers.

Some types of interest have always been received without tax deduction at source and will therefore continue to be paid gross. Interest on corporate bonds listed on the London Stock Exchange is paid gross for example. However, in 2016/17 basic rate tax continues to be deducted at source from some forms of savings income such as interest distributions from unit trusts and OEICs. This requirement is removed from April 2017.

Switching investments
Given the lower amount of SA, higher and additional rate taxpayers could seek to maximise their use of the DA by moving investments out of interest bearing investments to ones which pay out dividends. This could be through direct shareholdings or through dividend distributing equity funds in unit trusts or OEICs.

In addition, assets held for capital growth could be transferred to dividend paying investments. Any gains realised by the investors on the sale of assets would be exempt up to the CGT exemption which is £11,300 for 2017/18. Further gains over this amount are only charged to tax at 20% for higher and additional rate taxpayers following the reduction in CGT rates from 6 April 2016.

Interaction between DA and SA
If the amount of dividends an individual receives is covered by the DA but those dividends would have meant that they were higher rate taxpayers without the DA, then this would affect the amount of SA they would receive.

Example
Mrs B has a salary of £42,000, interest income of £1,000 and dividends of £5,000. Although the dividends are covered by the DA, Mrs B’s total income is £48,000 so she is a higher rate taxpayer. She would therefore only receive £500 of SA against the £1,000 of interest income.
Check your coding
Where savings income exceeds the SA, there will be tax to pay on the excess. HMRC have indicated that they will normally collect this tax by changing individual’s tax codes. To allow them to do this they will use information from banks and building societies. However in some cases HMRC have been overestimating the amount of interest people are likely to earn and adjusting their coding accordingly. So it is worth checking coding notices when they come through.

Gift Aid donations
Take care if you make Gift Aid donations. A charity can reclaim the tax on a Gift Aid donation only if the individual has paid the amount of tax being reclaimed. Prior to April 2016 this tax would have included dividend tax credits and tax deducted at source on interest income.

Following the introduction of the SA and DA, any income within these allowances is not taxed so the tax reclaim by the charity does not relate to tax paid. Where this happens the individual is responsible for ensuring that the donation is covered and HMRC have powers to recover any shortfall from the taxpayer.

So people with lower levels of income and dividends or savings below the DA or SA amounts who make Gift Aid donations could be affected. Individuals will need to withdraw any Gift Aid declarations that they have made to ensure that they do not get hit with a tax bill.

Planning for spouses
The introduction of Dividend and Savings Allowances may also mean it is time to consider the allocation of investments between husband and wives or civil partners. If just one partner has investments generating dividends or savings it could be beneficial to transfer part of the investments to the other partner to ensure they receive income which utilises their DA or SA. Any transfer of assets between husbands and wives or between civil partners who are living together can be made without any capital gains tax being charged.

With savings rates generally being at about 1.5% – 2% utilising the £1,000 basic rate SA would mean having interest earning assets of between £50,000 and £66,667. For dividends, assuming an average yield of 3%, the investment level would be £166,667 to fully utilise the £5,000 DA.