Moore Thompson is encouraging business owners and shareholders to consider paying back loans they may have received from their company following the government’s announcement to increase tax rates on repayment.
The move to tax loans to participators at a higher rate was not announced by the Chancellor in his main Budget speech to Parliament last month.
However, investigative work by the East of England-based firm has revealed that from the start of this month, the rate of tax payable by a company on any balances lent by it to an individual participator or related unincorporated business will increase from 25 per cent to 32.5 per cent.
This temporary tax is designed to ensure that the Treasury receives the same amount that it would receive had it been paid out by dividend instead.
This new measure is intended to mirror the effective higher rate of income tax on dividends which came into force on 6 April 2016.
Under these changes the way dividends are taxed will change and the 10 per cent tax credit currently available to taxpayers will be abolished to be replaced by a flat rate personal dividend allowance of £5,000.
Any dividends received in excess of this allowance will be taxed at 7.5 per cent if dividend income is within the standard rate band; 32.5 per cent if dividend income is within the higher rate band and 38.1 per cent if dividend income is within the additional rate band.
Mark Hildred, Managing Partner at Moore Thompson, said: “First the Chancellor came after dividends and now he has decided that it is time to tackle loans to owners, which effectively means any form of remuneration not linked to a salary will now be heavily penalised.
“While I appreciate that the government loses out on income tax and national insurance contribution it can collect because of these forms of remuneration.
“They are an essential tool to help businesses limit their monthly costs, by paying expensive salaries to their shareholders and owners.
Mark added that this latest Budget made it clear that the government feels businesses should only pay staff and owners through a traditional salary.
He said that changes to loans to participators, dividends and HM Revenue & Customs’ attitude to salary sacrifice had clarified the government’s intentions in regards to tax-efficient remuneration.
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