As you may be aware, the personal allowance and National Insurance rates will change with effect from 6 April 2017. For all those to whom a salary is paid which aims to be at the level of the personal allowance, the monthly salary payment should therefore increase to £680.33 per month (£8,164 per annum) for 2017/18. National Insurance contributions will not be payable by either the Director or employer at this level, but the Director will still receive credit towards their state pension for the 2017/18 tax year.
The dividend rates for 2017/18 remain unchanged from 2016/17, and are taxed as the top slice of income at the following rates.
£5k - dividend tax allowance
£11.5k - £45k
£45k - £150k
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The first £5,000 of dividends, known as the dividend allowance, is taxed at 0% irrespective of an individual’s other income.
Payment of dividends is a standard way for a company to distribute its profits amongst its shareholders, and we have advocated this for our clients for a number of years. There are, however, a number of rules which apply to the payment of dividends which we felt would be prudent to highlight:
- Dividends can only be paid where there are sufficient reserves within the company
- Dividends must be paid in accordance with the rights pertaining to the individual’s shares. If two shareholders hold the same type of share, then they are both entitled to the same amount of dividend per share. You can not pay different amounts of dividends on the same class of share.
- Dividends must be paid within the period they relate (ie. post year end adjustments to the accounts are not permitted).
- Payment of dividends must be noted in the minutes of the board meeting.
- Dividend vouchers must be produced and provided to shareholders documenting each dividend payment.
Tax on Investment Income
For 2017/18, the Personal Savings Allowance is still available which means that the first £1,000 (basic rate taxpayers) or £500 (higher rate taxpayers) of interest received will be tax free.
In addition to this, for individuals who receive only investment income in excess of the personal allowance (£11,500 2017/18), the first £5,000 of interest will be subject to the starting savings rate of 0%.
If an individual does not currently receive enough interest from other sources and has loaned money to the company, you may want to consider paying interest at a commercial rate on the loan in order to fully utilise these allowances. The company would need to deduct basic rate tax and submit a form CT61 to HMRC.
The annual allowance for pension contributions will be £40,000 for 2017/18. However, this will be reduced proportionally for individuals with income in excess of £150,000. For those with earnings of £210,000 or more, the annual allowance will be limited to £10,000. If you would like any further information regarding the changes to pension contributions or any other pension planning advice, our Hazlewoods Financial Planning team would be happy to help.
Enterprise Investment Scheme
Higher rate taxpayers could benefit from making investments that qualify for Enterprise Investment Scheme (EIS) relief. Providing the investment is held for a minimum of 3 years, 30% income tax relief is available on the amount invested. Our Hazlewoods Financial Planning team can also provide investment advice if you would like further details on EIS.
If you would like further information, or wish to have advice tailored to your individual circumstances, please do not hesitate to get in touch with me or your usual tax contact.
The information included in this article is based on current tax legislation which is subject to change and amendment. Before acting on the information, you should confirm that there have been no changes in the relevant tax legislation which could affect this information.