Government seeks out tax-efficient remuneration

The move to tax loans to participators at a higher rate was not announced by the Chancellor in his main speech to Parliament.

However, further investigation of the Budget documents has revealed that from this month, the rate of tax payable by a company on any balances lent 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 effective from 6 April 2016.

Under these changes the way dividends are taxed has changed and the 10 per cent tax has been abolished and replaced by a flat rate personal dividend allowance of £5,000.

Any dividends received in excess of this allowance are taxed at:

  • 7.5 per cent if dividend income is within the standard rate (20 per cent) band
  • 32.5 per cent if dividend income is within the higher rate (40 per cent) band
  • 38.1 per cent if dividend income is within the additional rate (45 per cent) band.

The Chancellor’s latest Budget has made it clear that the government feels businesses should only pay staff and owners through a traditional salary system.

The government’s intentions can be seen in the changes to loans to participators, dividends and HM Revenue & Customs’ attitude to salary sacrifice, which was clarified in the Budget to say:

“Salary sacrifice arrangements enable employees to give up salary in return for benefits-in- kind that are often subject to more favourable tax treatment than salary. The government wants to encourage employers to offer certain benefits but is concerned about the growth of salary sacrifice schemes.

“The government is therefore considering limiting the range of benefits that attract income tax and NICs advantages when they are provided as part of salary sacrifice schemes.”

The government has however clarified that pension saving, childcare and health-related benefits should continue to benefit from income tax and National Insurance Contributions relief when provided through salary sacrifice arrangements.

Link: Budget 2016