Important developments affecting limited companies in the healthcare sector
In the 2015 Summer Budget the government announced significant changes affecting companies which will apply to businesses operating in the healthcare sector; changes aimed at reducing the taxation advantages of incorporation. These changes did not grab the media headlines that day and consequently you may not be aware of the changes to dividend taxation and other issues that could impact on personal services companies.
From April 2016, the notional 10% tax credit on dividends paid will be removed. On the plus side this will remove the confusion between gross dividends and dividends paid net of the notional 10% tax credit.
Dividends will be taxed at 7.5%, 32.5% and 38.1%, depending on the marginal rate of income tax, representing real increases in taxation. However, the blow is softened by the introduction of a £5,000 dividend allowance for all taxpayers, regardless of the level of non-dividend income.
You will pay tax on any dividend you receive over £5,000 at the following rates:
• 7.5% on dividend income within the basic rate band for income tax
• 32.5% on dividend income within the higher rate band for income tax
• 38.1% on dividend income within the additional rate band for income tax
The proposed changes are aimed to tax small companies who pay a small salary designed to preserve entitlement to the State Pension, followed by a much larger dividend payment in order to reduce National Insurance costs.
The following two examples illustrate the cost in 2016/17 of the new measures to small company owners based on our understanding of the changes, which are subject to finalisation.
The basic rate tax threshold for 2016/17 is £43,000 (personal allowance of £11,000, plus basic rate tax band of £32,000). The examples assume that the tax payer has other income, for example directors’ salary, which fully utilises the personal allowance.
The dividend allowance is within the tax payer’s basic rate band
Under existing tax legislation, if you receive a dividend of £32,000 this would be received net of the notional 10% tax credit, and in this example, no further tax would have been due.
From 2016/17, under the new rules, if you receive a dividend of £32,000 it will be taxed in bands as follows:
• the first slice of £5,000 will be covered by the dividend allowance
• the remainder of your basic rate band £27,000 will be taxed at 7.5%, £2,025 tax due
The tax payer will be up to £2,025 worse off.
A higher rate tax payer with dividends of £50,000
Under the existing tax legislation, a net dividend received of £50,000 is grossed up to £55,555 taxable income by the notional tax credit at 10%, amounting to £5,555.
A higher rate tax payer is then taxed in bands as follows:
• the first £32,000 of gross dividend is taxed at 10%, £3,200 tax due
• the balance of £23,555 is taxed at 32.5%, £7,655 tax due
The final tax liability due is net of the 10% notional tax credit. So under current rules, the final tax due will be £10,855 less £5,555 notional tax credit, the tax due will be £5,300.
From 2016/17 under the new rules, a higher rate tax payer receiving dividend income of £50,000 will be taxed in bands as follows:
• the first £5,000 will be covered by the dividend allowance
• the next £32,000 taxed at 7.5%, £2,025 tax due
• the final £18,000 taxed at 32.5%, £5,850 tax due
In total under the new rules, the tax due will be £7,875.
The tax payer is £2,575 worse off.
The increased tax burden will vary from shareholder to shareholder, dependent upon their individual financial circumstances. The above scenarios are general illustrations only.
Dividends received by a pension fund that is currently exempt from tax, and dividends received on shares held in an Individual Savings Account (ISA) will continue to be tax free. Sheltering taxable investments in ISAs will become more important. As each individual is entitled to the tax free allowance of £5,000 couples should consider spreading their taxable portfolios and utilising spouse’s basic rate bands.
Some company owners may be resigned to absorbing these tax increases, others may wish to consider seeking further advice from Moore and Smalley on planning 2015/16 dividends and strategic business and personal options available post 2016/17.
Other issues that could have an adverse effect for personal service companies
The 2015 Summer Budget also announced the news that HMRC is to review the IR35 provisions which relate to personal service companies. HMRC seek to “find a solution which protects the Exchequer and improves fairness in the system”.
Directors of companies operating in the healthcare sector also need to be aware of recent HMRC tax tribunal cases relating to companies supplying locum medical services and the VAT status of those supplies. Our recent healthcare videos provide more information on this topic.
If your company provides personal services, e.g. out of hours work, locum work, appraisals, medicals and other similar reports, it is important that you make yourself aware of these potential issues.
For more information, please contact David Walker (North West) on 01253 404404.