The 2015 summer budget dramatically changes taxation on dividends. Whilst the first £5000
may be tax-free, you may generate much more dividend income than this and will almost certainly be significantly worse off. Business owners need to act NOW to minimize the impact by considering extracting whatever surplus cash they may have in their business as dividends before April or use pension contributions. Just to remind readers, pension contributions aid by the employer nearly always attract corporation tax relief and attract no tax for the employee. A business can pay £40,000 per annum for an employee and if the employee hasn’t used this allowance it can be backdated three years. This means many husband and wife shareholder employees could benefit from a tax-free contribution of £360,000 or more in some circumstances.
Before you say ‘I don’t like pensions’ you must remember that last year’s pension changes have basically turned pensions into super tax efficient savings accounts with tax relief on contributions, tax free growth, 25% available tax free at retirement (and the balance at probably lower than your current income tax rates) and are also exempt from Inheritance tax. And remember, under the new rules they are totally accessible from age 55 onwards, no need to buy annuities or have the HMRC control the withdrawals, you can draw down what you want. Very simply, pensions are not pensions anymore and you can forget most previous objections!
This paints a very different and exciting picture indeed. Many are still worried about the underlying investment of pensions, but you can invest in pretty much what you want except residential property. Let’s consider this exciting example for a typical SME and the opportunities a pension may give the business owners and ultimately their families.