Tax relief reforms call for ‘minded change’
Continuing changes to the tax relief system for small businesses and individuals require a mindset change for the whole accounting industry. “One-size-fits-all” solutions frequently no longer apply, especially in areas such as the changes to the dividend tax.
Previously, basic-rate taxpayers paid no tax on their dividend income, while higher-rate taxpayers paid an effective rate of 25% and additional-rate taxpayers paid 30.56%. This was less than they would pay on earned income, because dividends are paid out of company profits that have already been subject to corporation tax.
Under the new rules announced in last year’s Budget changes and due to come into force on 6 April, the first £5,000 anyone receives in dividend income will be tax free. After this, however, basic-rate taxpayers (who were previously exempt) will pay 7.5% tax on any additional dividend income. The higher-rate taxpayers are set to pay 32.5%, and additional-rate taxpayers will pay 38.1%.
Changes such as these require a tailored approach in terms of accountancy and tax advice, as what works for one company or individual might not be the best solution for another. Some family-run businesses, for example, may have operated in the past with a number of different family members as shareholders, with each taking relatively small amounts in the form of dividends. The best solution in that case might be to change those dividends to salaries, which may then qualify for corporation tax relief.
This approach may be less suited for businesses where larger dividends are being paid out, but that is the point – each case is individual, and accountants will have to work closely with their clients to find the best solutions. In addition to the dividend tax changes, there are a number of other factors to take into account, and various tax reliefs could still apply in different situations. These could include a quite generous research and development (R&D) relief, entrepreneurs’ relief, business property relief and relief from capital gains tax (CGT).
As austerity continues to bite and the Government looks for more ways to boost revenues, the tax landscape is likely to keep changing. This will require a proactive and personal approach from those working in the accountancy and advice sector.