Planning Ahead for Dividend Reforms

From 6 April 2016 the way in which dividends are taxed is changing significantly.  The 10% dividend tax credit is abolished.  That means that it will no longer be necessary to gross up the net dividend actually paid to determine the gross dividend charged to tax.  Instead, the amount actually paid will be the amount that is treated as taxable income.  Whist this makes life simpler, the downside is that there will be no tax credit to offset against the tax due on the dividend.  To compensate for this, all taxpayers will receive a tax-free dividend allowance of £5,000.  Dividends received in excess of this will be taxed at the new dividend rates of tax applying for 2016/17, which are as follows:-

7.5% to the extent that the dividends fall in the basic rate band;

32.5% to the extent that the dividends fall in the higher rate band;

38.1% to the extent that the dividends fall in the additional rate band.

TAX CHARGE ON ANNUITY SALES TO BE REDUCED FROM APRIL 2017

The Government has confirmed that from 6 April 2017, tax restrictions for people looking to sell annuities will be removed, giving those with existing annuity, and anyone who purchases an annuity in the future, the freedom to sell their right to future income streams for an upfront cash sum.

Currently, people wishing to sell their annuity income face a 55% tax charge, or up to 70% in some cases. This charge is to be removed, so that people will only be taxed at their marginal rate.

Under the new changes, retirees will be able to take the annuity as a lump sum, or access the new flexible drawdown products introduced in April 2015.

 

The Government is working with the Financial Conduct Authority (FCA) to develop appropriate steps to regulate the market. The FCA will consult in 2016 on proposed rules for the secondary annuities market.

SINGLE DIRECTOR COMPANIES EXCLUDED FROM £3,000 NIC EMPLOYMENT ALLOWANCE

From 6 April 2016 the Employment Allowance increases from £2,000 to £3,000, but if you’re the only employee in a company, and also the director, your company will no longer be eligible for the NICs Employment Allowance.

HMRC is currently consulting on the draft legislation for this change which will mean that the £3,000 allowance will not be available to offset against the employers’ NIC liability of such companies.

CONTRACTING OUT OF ADDITIONAL STATE PENSION ENDS 5 APRIL 2016

From 6 April 2016 employees of contracted-out defined benefit (DB) schemes will automatically be brought back into the State Pension scheme and will no longer be able to use a contracted-out salary related (COSR) occupational pension scheme to contract out of the State Scheme. Employees will, depending on their level of earnings, start to accrue entitlement to the new State Pension instead.

Eligibility for the contracted-out National Insurance contributions (NICs) rebate of 3.4% for employers and 1.4% for employees will also cease from this date.  This will bring with it some changes in what and how you report to HMRC:

  • from 6 April 2016: You will not be able to use your Contracted-out Salary Related (COSR) occupational pension scheme to contract employees out of the new State Pension scheme
  • there will no longer be a requirement to report the Employers Contracting-out Number (ECON) and Scheme Contracted-out Number (SCON) details on Full Payment Submission (FPS) for tax years commencing 6 April 2016 and onwards
  • there will no longer be a requirement to separate the National Insurance (NI) earnings between the Primary Threshold (PT) and Upper Accrual Point (UAP) & UAP to Upper Earnings Limit (UEL)
  • there will be a requirement to report NI earnings between the PT to UEL as there was prior to 2009
  • there will be one less column to complete on forms P11 and P60. These forms will be updated in due course and available on the Basic PAYE Tools or can be ordered from the Employer order-line. All HMRC systems will be amended to reflect these changes and the UAP data field will be removed from the FPS and Earlier Year Update (EYU).

All payroll software will need to be amended.

 National Insurance Categories from 6 April 2016

Contracted-out National Insurance tables/ categories D, E, I, K, L, N, O and V will be replaced by Standard National Insurance tables/categories A, B, J, M, P, Q, R, T, Y and Z

END OF YEAR PAYE RETURN REMINDER AND TAX DIARY OF MAIN EVENTS

END OF YEAR PAYE RETURN REMINDER

Under RTI the end of year form P35 was replaced by the Final Full Payment (FPS) submission. Send your final FPS on or before your employees’ last payday of the tax year (5 April) instead of the old 19 April deadline. Remember to put ‘Yes’ in the ‘Final submission for year’ field in your payroll software.

TAX DIARY OF MAIN EVENTS

Date What’s Due
1 February Corporation tax for year to 30/4/15
19 February PAYE & NIC deductions, and CIS return and tax, for month to 5/2/16 (due 22 February if you pay electronically)
28 February Surcharge of 5% on 2014/15 self -assessment tax still unpaid.
1 March Corporation tax for year to 31/5/15
19 March PAYE & NIC deductions, and CIS return and tax, for month to 5/3/16 (due 22 March if you pay electronically)