Q. I run a small Limited Company employing three staff. Most of my personal income is made up from dividends from the Limited Company. Am I right in assuming that I will experience a rise in taxes next year because of the recent budget?
A. Yes most likely, depending upon the level of income you take in dividends from the Limited Company. Currently all UK dividends are paid with a notional 10% tax credit, so for every £1,000 of dividend income received it is assumed that £111 in basic rate tax has already been paid (the total dividend is therefore £1,111). This is why non and basic rate tax payers have no further tax liability on dividends received. This tax credit is being scrapped, so in future all dividend income will be treated as gross (i.e. untaxed) income. George Osborne announced that he would be replacing dividend tax credit with a tax-free dividend allowance of £5,000 for all taxpayers. It means that dividend payments above that amount paid after 6 April 2016 will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. These rates replace the current rates of 0% for basic rate taxpayers, 25% for higher rate taxpayers and 30.56% for additional rate taxpayers.
Q. A few weeks ago you answered a query about someone with a number of different bank accounts and how they might be receiving a negative return after inflation is taken into account. Is it not best to keep within the compensation figure of £85,000, in case there is a problem like there was with Northern Rock?
A. Whilst returns on bank deposits are currently relatively low, a bank or building society account is one of the few investments you can make where the capital should be secure and guaranteed. However, as you point out, the security is only as strong as the provider behind the guarantee. The Financial Services Compensation Scheme offers protection for your savings in the event of the failure of a provider, and as you point out the amount of the protection is currently restricted to £85,000 per depositor, so a couple with a joint account could have protection up to £170,000. However the limit is changing from 1st January next year, to £75,000 per person. The reason for the change is to keep in line with similar protection across Europe, based on €100,000. The scheme is set up by government but funded by a levy across all providers. The limit applies to savings with a particular bank or building society. It is actually a limit per banking licence, so if you have an account with more than one provider, it is worth checking on the Financial Conduct Authority website whether your accounts under different brands are actually with the same provider. As an example (and this is not in any way a comment on the security of the provider) accounts offered by Birmingham Midshires, the AA and Saga are all provided under the Bank of Scotland banking licence.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
