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Remuneration planning for company owners for the 2016/17 tax year

March 15th, 2017 by Andrew Scott - Manager

It’s that time of year again – the 5 April tax year-end is fast approaching. If you haven’t considered whether you’ve made full use of your allowances, you are running out of time to do so.

Dividend allowance

From 6 April 2016, the way in which dividends were taxed changed. The notional tax credit was abolished and a £5,000 tax-free allowance was introduced.

Dividends are now taxed at the following rates (all 7.5% higher than previous effective rate):

  • Basic rate                7.5%
  • Higher rate            32.5%
  • Additional rate    38.1%

It still remains cheaper to take a small salary and high dividends (where this works) than to take a high salary.  As such, dividend versus salary planning remains much as before, just with a slightly smaller tax gap between them.  In the wake of the changes, some clients have been revisiting whether other family members might hold shares and receive dividends, and this is something we can discuss.

If you haven’t used your £5,000 tax-free dividend allowance for the 2016/17 tax year yet, you have until 5 April 2017 to do so.

Please note following the Budget on 8 March 2017, it was announced that the dividend allowance will reduce to £2,000 with effect from 6 April 2018.

Pension contributions - Annual Allowance

This represents the total employee and employer contributions that a member can pay into their registered scheme in a tax year and obtain tax relief.  Unused allowances of the previous 3 tax years can also be used, where you have been a member of a qualifying scheme.  Contributions in excess of this are subject to an annual allowance charge, in order to remove any tax benefits already obtained.

The annual allowance currently sits at £40,000 but from 6 April 2016, this is now tapered for taxpayers who have ‘adjusted income’ over £150,000 and ‘threshold income’ over £110,000.

The tapering reduces the Annual Allowance by £1 for every £2 of ‘adjusted income’ in excess of £150,000.

‘Threshold income’ is taxable income less the gross amount of any pension contributions for which basic rate tax relief has been given at source.

‘Adjusted income’ is taxable income plus employee pension contributions paid out of pre-tax employment income plus any employer’s pension contributions.

If you are already withdrawing benefits from a registered pension scheme, the maximum Annual Allowance for pension contributions is restricted to £10,000, reducing to £4,000 from 6 April 2017.

With the end of the tax year looming, if you haven’t already considered these changes, please speak to Andrew Scott or your usual Ensors contact.

If you would like a more detailed remuneration planning exercise performed, we can look at restructuring options to keep the cost to the company broadly the same but achieve a higher net income for individual director/ employee shareholders.


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