Remuneration planning – changes from the 2015 Summer Budget
Alan Boby, Partner at UK200Group member firm Ellacotts LLP, discusses the potential alternatives to remuneration through dividends following changes in the 2015 Summer Budget.
The new dividend tax, planned by George Osbourne to start in April 2016, is exercising the minds of many tax specialists at the moment. It might be fair to say that the changes will move the tax pendulum away from dividends to other forms of remuneration for owner/managers of private companies. Paying a higher salary may be an alternative, but that usually comes with the cost of higher national insurance contributions (NICs). A third way may be open to owner/managers if they have lent money to their companies. This is because they may be able to charge interest on these loans and usually at a reasonably high rate if unsecured, but with a corporation tax deduction and without the NIC costs.
If payment of interest is considered as an option, it is important to remember that UK companies need to deduct tax on interest payments made to individuals. The tax deduction rules extend to cover payments of interest and other ‘annual payments’ (such as royalties) made by companies to individuals. Tax should be deducted at the basic rate of income tax (currently 20 per cent) and is reported to and paid using a special form (form CT61). The form has to be ordered from HM Revenue & Customs (HMRC) using a special telephone order number and it is then sent directly to the company.
The form needs filing with a cheque payable to HMRC for the income tax by the 14th day after the end of the calendar quarter in which the interest/annual payment is made, with one exception. The exception occurs when the company has an accounting period that ends on a date, other than the end of a calendar quarter and the interest/annual payment is made in the period before that accounting date and after the end of the preceding calendar quarter. In other words, if a company makes regular payments it may need to submit five CT61 forms and tax payments in a year.
Subsequent CT61 forms will be automatically issued by HMRC and should be filed 14 days after the end of each period in which any interest/annual payment is paid to individuals. Late forms and tax payments are liable to interest charges and, in extreme cases, penalties.
The company should also provide the individual with a tax deduction certificate (form R185) which is available as a downloaded document on HMRC’s website at http://www.hmrc.gov.uk/forms/r185cert.pdf. The individual can then use the amounts on the form R185 to complete the relevant self-assessment tax return and prove that income tax has been paid (at the basic rate) at source. Some higher rate taxpayers will then need to pay further income tax on the income on the normal self-assessment payment dates.
Companies do not need to deduct tax from interest/annual payments to companies or banks but there are rules about deducting withholding taxes from payments made to persons outside the UK.
As with all such tax situations, advice should also be sought before proceeding. For further details call Alan Boby on 01295 250401 or email firstname.lastname@example.org
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