Dividend tax following the Summer 2015 Budget

One of the major announcements in the Summer Budget, affecting owner managed businesses was the proposed changes to dividend taxation.  Very little was announced on Budget Day but the Government have now published a factsheet providing further details on the Dividend Allowance which also provides examples of how the new tax allowance will work when it comes into force on April 2016.


To recap:

From April 2016 the dividend tax credit will be abolished and a new dividend tax allowance of £5,000 a year will be introduced. Dividends received up to £5,000 will be covered by the new Dividend Allowance and will be tax free, but dividends exceeding this amount will be taxed at the following rates:


  • 7.5% on dividend income within the basic rate
  • 32.5% on dividend income within the higher rate band
  • 38.1% on dividend income within the additional rate band


The Dividend Allowance factsheet gives 6 useful examples demonstrating how individuals could be affected.  Click here for a copy of HMRC’s Dividend Allowance Factsheet


Although the Governments headlines say “this simpler system will mean only those with significant dividend income will pay more tax”, we believe that in most cases where business owners extract profit by way of dividends, the new rules will lead to an increase in their tax liability.


With a split of income of £8,000 (to trigger basic national insurance) and £40,000 dividends received you will be £1,450 worse off in 2015/16.  A salary of £8,000 with £50,000 dividends will result in £2,200 additional tax.


Recipients of dividends who were previously did not have a tax liability will now have to pay tax if they are in receipt of dividends in excess of £5,000 and they will need to register with HMRC and complete a self assessment tax return to report this.


It is important therefore to plan for these changes in the current tax year.  It may be worth paying additional dividends in 2015/16, assuming there are sufficient distributable reserves, even if this accelerates the payment of income tax for those liable at the higher or additional rate of tax.


Call Liric now to find out how the new rules will affect you – 01763 853633.


HMRC Target online sellers

Thousands of online sellers will need to get their tax affairs in order as HMRC wields its expanded powers to get user information from online marketplaces like Amazon, Gumtree, Ebay and Etsy. The Revenue has sent 14,000 letters to traders suspected of running a business and failing to declare this on their tax returns. Of these, 1,000 letters are being sent to people where the taxman has already identified a shortfall on their self-assessment forms.The new crackdown was launched on the back of extensive new powers introduced last year enabling HMRC to download people’s account information. It was reported in theTelegraph that eBay, Etsy, Amazon and Gumtree are being forced to hand over customer account details, including their selling activity, as part of the taxman’s legal powers that were extended last year.

The HMRC also avoided stating exactly what the threshold is where an online seller becomes an online trader. Instead, the Revenue uses the badges of trade as their guiding principle.. The criteria used to assess if an activity is a hobby or a business are:

  • The size and commerciality of the activity.
  • The frequency of the activity and transactions
  • The application of business principles.
  • Whether there is a genuine profit motive.
  • The amount of time devoted to the activities.
  • The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).

Some of the 14,000 targeted thus far had made as little as £100 profit online.

“Anyone just selling the occasional item has nothing to worry about. This is about making sure on-line traders pay the right tax – wealthy or otherwise. We will make contact with those that we are aware might need our help to get it right,” said a HMRC spokesperson.

The spokesperson went on to confirm that those continuing to avoid the Revenue’s overtures, could face penalties and that the taxman “will determine the amount of tax due based on the information we have available”.

HMRC have some great examples to help you decide, for example:

Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.

In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.

She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.

She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.

Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality. She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT. Many traders start off in a small way and assume their activity will be treated as a hobby. They don’t realise that if it grows into a business they need to register with HMRC. You should register as Self Employed as soon as your hobby becomes a commercial venture, even if you are losing money! 

If you don’t register, HMRC will be looking for you and if you have an online business it won’t be hard for them to find you. If you need any help with registering as Self Employed just drop me an email or book a free call with me at www.liricaccountants.com

tax return

Tax Returns

LIRIC successfully filed 340 tax returns on behalf of our clients.  Some were very last minute – you know who you are! We thought you might be interested in some of the previous years unsuccessful excuses used in failed appeals against HMRC penalties for late filing and payment:

  • My pet dog ate my tax return…and all the reminders.
  • I was up a mountain in Wales, and couldn’t find a post box or get an Internet signal.
  • I fell in with the wrong crowd.
  • I’ve been travelling the world, trying to escape from a foreign intelligence agency.
  • I’ve been busy looking after a flock of escaped parrots and some fox cubs.
  • A work colleague borrowed my tax return, to photocopy it, and didn’t give it back.
  • I live in a camper van in a supermarket car park.
  • My girlfriend’s pregnant.
  • I was in Australia.

On 6 April those HMRC “Notices to file a tax return for 5/4/15” will be coming through your post box – so get organised – let LIRIC have everything in good time and not only does your tax return get filed but we can advise you of your tax liability – preventing any unexpected payments.  LIRIC will be writing to you soon.

Diary for Tax Return Dates

19 December  PAYE & NIC deductions, and CIS   return and tax, for month to 5/12/2014.
(22 December if you pay electronically)
1 January Corporation tax for year to 31/3/14
19 January  PAYE & NIC deductions, and CIS return and tax, for month to 05/01/2015
(due 22 January if you pay electronically)
31 January Deadline to file 2014 Self Assessment (SA) tax return online
31 January Income tax balancing payment for 2013/14, plus CGT for 2013/14
31 January Income tax 1st payment on account for 2014/15