Tax free dividend squeeze confirmed

The government reintroduced the remainder of the March budget last week, it’s the part that was held-over to accommodate the May 2017 general election.

It confirms two items that will be of interest to smaller business owners.

Firstly, that businesses with turnover below the current VAT registration threshold (£85,000 for 2017-18) will not be required to keep digital records – although they may choose to do so – and will not be required to upload quarterly returns of their trading results to HMRC. This is a sensible approach to the Making Tax Digital (MTD) agenda.

Traders that are registered for VAT will need to ensure that they are using compatible software from 1 April 2019, when the obligation to file VAT returns using the new MTD platform commences. If we file VAT returns for you, we will make sure that our software applications are compliant. If you file your own returns we can help you select appropriate software.

Secondly, the Bill confirms that the £5,000 tax-free dividend allowance is being reduced to £2,000 from April 2018.

Small companies, with spare reserves, should ensure that shareholders consider a minimum £5,000 dividend for the current tax year (2017-18). From April 2018, a £5,000 dividend will cost a basic rate income payer £225 in tax. If cash flow is an issue, the dividends can be transferred into a loan account and drawn down when funds are available.

For the present, dividends are a return on capital and not remuneration subject to NIC. While this remains the case, it will still pay to adopt the high dividend, low salary approach.

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