Catering Scotland

As a business owner, paying yourself a salary or dividend out of profits is a choice which has been afforded to owner-managed businesses for years.

As corporation tax rates have fallen and National Insurance rates have increased, dividends have traditionally presented an appealing alternative to the expensive PAYE system.

However, during last summer’s Budget, the then Chancellor, George Osborne, quietly announced a raft of major reforms to the taxation of dividends, with the result that their immediate appeal could soon begin to dwindle for many operators throughout the UK.

David McComb lifts the lid on the most sweeping set of changes to hit dividends, and shareholders, for decades…

Salary and dividends as they used to be…

Assuming a salary had been drawn up to the personal allowance level, Table 1 below highlights the difference in tax liability between taking an additional salary of either £50,000 or £100,000, and a company which pays the corporation tax and a dividend.

The company is left in the same overall position but the individual is better off under the dividend scenario.

Table 1

…and as they are now, from 6th April this year

The first change of note is a new dividend allowance of £5,000, which represents a nil rate band. So, although the first £5,000 of dividend income will not be subject to income tax, it will still be taken into account when determining the marginal rate of income tax to be applied to any dividends in excess of this amount.

 The changes to the dividend tax rates are summarised as follows:

Essentially, the new rules represent a 7.5% increase across the board on anything over the £5,000 allowance.

NB: The effective rates above for 2015/16 are after deduction of the tax credit which is currently payable in relation to dividends.

Using the same example as per Table 1, the new figures for 2016/17 are as follows:

Table 2

Table 2 demonstrates that while paying dividends is still, in most cases, the most efficient option, the individual’s liabilities via the dividend route have increased by £2,191 and £4,626 respectively from 2016/17 onwards.

Are there any alternatives?

Of course, taking a salary or dividend isn’t the only way to extract money out of a business, and many owners provide their companies with other resources such as loans or use of personal property which they may not necessarily charge for.

With this in mind, charging interest or rent may be a further efficient way of extracting funds, namely by obtaining a tax deduction for the company but without the National Insurance liabilities of a salary.

It’s worth noting, however, that there are further tax implications of paying interest and charging rent, particularly in relation to the latter, as it can impact on the Capital Gains Tax rate at the time of disposal.

Likewise, the impact on child tax credits and claims for R&D tax credits (if salary costs form part of this) also need to be taken into consideration.

Whichever route you choose, professional advice should always be sought beforehand. Each individual is different and the level of tax you pay – or indeed the level of relief you are entitled to – will depend very much on your own personal circumstances.

David McComb is Tax Director at Mazars UK, which provides full accountancy and payroll services to all sectors. For more information on how they can assist hospitality and catering operators, visit www.mazars.co.uk.

This article has been edited from its original version, which appears in the 2016 Catering Scotland yearbook. To order your copy, email yearbook@cateringscotland.com.