Categories
Personal Taxation

Dividend tax rises

On 8 September 2021, the Prime Minister outlined the Government’s plans for health and social care, including a new funding strategy designed to meet social care costs. The plans include increasing National Insurance for employers, employees and the self-employed by 1.25% for 2022/23 only, before launching a new social care levy of 1.25% from April 2023, and raising the dividend tax rates by 1.25% from April 2022.

For clients with personal and family companies, extracting profits as dividends once a small salary has been taken is a tax-efficient strategy. One of the advantages of taking dividends rather than a higher salary is that dividends do not attract National Insurance. As the salary level is typically set at a level such that little or no National Insurance is payable, the planned increase in the dividend tax will have the effect of collecting a social care levy from clients who effectively pay for themselves in dividends. However, it will also affect clients with share portfolios, who may also be paying higher National Insurance contributions on their salaries or self-employment profits.

As the planned increase in dividend tax does not take effect until April 2022, it is possible to plan ahead. Clients with profits to extract may wish to take dividends before 6 April 2022 to take advantage of the current dividend tax rates. This may be particularly advantageous where the client has not used all of their basic rate band. Where an alphabet share structure is in place, dividends can be tailored to utilise the basic rate band and dividend allowances of family members who are also shareholders, providing other options for extracting profits prior to April 2022. If there are significant retained profits to extract and it is likely that the basic rate band will be used for the foreseeable future, again it may be worthwhile extracting profits prior to 6 April 2022 to save tax of 1.25%, even where the dividends are taxed at the higher dividend rates. This may be worthwhile if the funds are likely to be needed outside the company.

When planning ahead, clients should also be mindful of the corporation tax changes that will apply from 6 April 2023, increasing the rate of corporation tax payable where profits are more than £50,000. As dividends are paid from post-tax profits, a higher rate of corporation tax will reduce the profits available for distribution as dividends.

Categories
Pensions Personal Taxation

Pension Tax Trap

Individuals may have made pension contributions in the year but they may also have accessed some of their pension savings in the year or in an earlier tax year.

The MPAA does not apply if the benefits are taken as:

Where an Individual has flexibly accessed their pension benefits from a defined contribution pension scheme or SASS, their pension contributions should be restricted from that date onwards (the trigger date). This restriction is imposed by the money purchase annual allowance (MPAA), which was initially set at £10,000, but reduced to £4,000 on 6 April 2017.

The MPAA does not apply if the benefits are taken as:

  • a small pots lump sum;
  • a pension commencement lump sum and no income is taken; or
  • the income comes from a capped draw-down arrangement.

Where the MPAA does apply, any contributions paid into a money purchase (defined contribution) scheme after the trigger date are measured against the MPAA. Where those contributions exceed the MPAA, a tax charge will be due.

As 2017/18 is the first year for which the lower MPAA of £4000 applies, more Individuals are likely to be caught by this tax charge. HMRC has recently set up an online tool to help clarify whether the MPAA tax charge applies, but the accompanying explanation is not easy to follow.

So specialist advice may be required to clarify whether an individual has to pay a pensions tax charge in respect of contributions paid in 2017/18 or earlier.

Guidance for IFAs on the MPAA

HMRC guidance on the MPAA