For those of you who don’t remember Hector, he was the advertising figurehead for HMRC, until his removal in 2001. It was helpful Hector who reminded people to submit their self-assessment tax returns on time.
Not so long ago, entrepreneurs were encouraged to incorporate companies by enticing them with a 0% corporation tax. Once they were sufficiently intoxicated with this, HMRC released their IR35 legislation which resulted in long-lasting hangovers.
If that wasn’t enough, now the Chancellor is about to attack us with a sugar-coated, double-edged sword and revamp both the taxation of dividends and relief for pension contributions to raise more taxes.
It seems that Hector has had a rather aggressive facelift as he gears up for the changes from 6 April 2016.
On a serious note, what is the ‘right’ choice for business owners to ‘pay the right amount of tax’, in extracting profit from their company? The mantra from most tax advisors was (and probably still is) a mixture of salary and dividend and a sprinkling of pension contribution. But this is tantamount to utilising pen and paper in a digital world. Whilst this concoction could work, prescribing it in isolation, without consideration to non-tax related factors, could be perilous.
Whilst tax relief for pension contributions are available (for now, at least) the pension world is also a rocky landscape demanding a strong sense of balance.
Dividends – Sweet Pain From a Bitter Pill?
The ‘sugar-coating’ is only for taxpayers who receive dividend income of less than £5K. If the dividend income exceeds £5K, the bitter taxes start eating into your income.
These are now in vogue for the following reasons:
- Changes in the pension input period from 2015/16 which could result in the availability of tax relief for £80K (instead of £40K).
- There will be no inheritance tax on a pension member who designates his unused pension fund before death.
- Pension drawdown is now more flexible – in addition to the 25% tax free withdrawal (which has always been available), a pensioner can draw sums in excess of 25% (but will be subject to income tax at the marginal rates); and
- Unlike dividends, a company can pay a pension contribution even if it does not have distributable reserves.
Alternative tax reducers
A pension is not just a tax reducer but an investment to provide a source of income at the end of one’s working life. A pension (like all investments) is not devoid of risks and it is therefore necessary to consider other tax friendly investments which (are likely to carry more risk but) are not even mentioned when considering the salary, dividend, pension triangle.
If you would like to evaluate how this affects you, feel free to call us on 020 7600 5667 to arrange a no-obligation initial consultation.
Elman Wall offers a range of tax planning opportunities and our sister wealth management adviser firm Cavendish Ware can complement this.
We look forward to hearing from you – but don’t leave it too late!
The Elman Wall Tax Team