Abolition of Dividend Tax Credit

The taxation rule on dividends which has been followed for over 40 years is set to change now as part of tax simplification initiative announced by George Osborne in Summary 2015 budget.

The background to this overhaul is this. The corporation tax has gone down steeply from 50% that prevailed decades ago down to 20% today and is due to fall to 18% in the year 2020. However, the rules on dividend tax remained the same, encouraging small business owners to extract most of the profits as dividends. From April 2016, there will be a different set of tax rates for dividends with a simplified structure.

Tax will be payable at the following rates on dividends in excess of £5,000 at the following rates:

  • 7.5% on dividend income within the basic rate band
  • 32.5% on dividend income within the higher rate band £32,000
  • 38.1% on dividend income within the additional rate band £43,000

The final implementation details are yet to be announced, but the illustrations below can be used as a fair guideline. Assuming a personal allowance of £11,000, the last two columns compare the dividend tax payable under the current and new rules.

Dividend Income Salary Current Rules From April 2016
£12,000 £11,000 Zero £520.00
7.5% on £7,000
£22,000 £11,000 Zero £1275.00
7.5% on £17,000
£40,000 £11,000 £1,848 £3,375.00
7.5% on £32,000 plus
32.5% on £3,000

T&S Legislation

The changes to the Travel & Subsistence legislation with the insertion of the  two new sections 339A and 688B into the ITEPA effective April 2016 will prevent contractors providing services through personal services companies from claiming relief on travel & subsistence cost incurred towards normal travel from home to work. Refer also the separate article titled T&S Legislation 2016 – how does it affect Personal Service Companies for more details.

The changes suggest that only the contracts that are caught by IR35 will be affected. This means, PSC contractors can continue to claim T&S expenses incurred towards provided services under contracts not caught by IR35 which can potentially change this scenario and very well render it not possible for PSC contractors to claim T&S expenses.

Employment Allowance

The Employment Allowance which is at present £2000 per year will increase to £3000 from 6th April 2016, but there are restrictions announced by the chancellor in the summer budget 2005. The restriction applies to businesses with a director as the sole employee. Since the objective of the employment allowance to encourage businesses to employ people, it all makes sense. However, there is not much clarity on how this will be monitored. For example, is there a minimum number of weeks there should be an employee? What if a genuine businessman employs someone and the employee leaves after eight months? The business would have claimed the allowance by then and do they have to pay it back if HMRC deems it as non-eligible.

However there is no ambiguity on Personal Service Companies that has a single director-employee structure.  So the contractors who have this model may have to lose this benefit unless they genuinely employ someone – may be another contractor can be employed.

IR35 Reforms

There are some radical changes that are being discussed or at least thought to be considered. The most radical of them being the speculation about Government’s intention is to stop limited companies from contracting with the same end client for more than one month! Two national newspapers The Guardian and The Daily Mail published similar stories in November 2015 apparently revealed to them by certain government sources. There are no comments or announcements on this from HMRC as of now, but if it’s true, the intention seems to be to put the onus on the end clients to “employ” the contractors if the contract length is beyond 1 month. If the PSC contractor is supplied by an Agency then the onus shifts to the Agency.

There will be a new ESI (Employment Status Indicator) test that will incorporate an amended definition of SDC (Supervision, Direction or Control) to test the eligibility of PSCs to be excluded from IR35. The ESI test can be done by the contractors on-line.

More recent legislation

Read more about recent legislative changes over on our Primo Payroll site:

Auto Enrolment Payroll Legislation

PAYE Rates and Deadlines

Real Time Information Payroll Legislation

Automated Agency Worker Regulations (AWR) Solutions