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Freedom from Pensions Freedom
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Important Information
This presentation is for adviser use only, and contains some forward thinking statements which should not be taken as fact. Information given is based on our current understanding, as at April 2016, of current taxation, legislation and HMRC practice, all of which are liable to change and subject to an individual’s own circumstances. Terms and conditions of products are available on request. The level of charges may change in the future. For webex presentations, the event may be recorded for training purposes. No reproduction, copy, transmission or amendment of this presentation may be made without the written permission from Prudential. PAC & Prudential Retirement Income Limited (PRIL) - Prudential" is a trading name of The Prudential Assurance Company Limited and of Prudential Retirement Income Limited. This name is also used by other companies within the Prudential Group. The Prudential Assurance Company Limited is registered in England and Wales. Registered office at Laurence Pountney Hill, London EC4R 0HH. Registered number Prudential Retirement Income Limited is registered in Scotland. Registered office at Craigforth, Stirling FK9 4UE. Registered number SCO Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority
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To be able to demonstrate an understanding of:
Learning Objectives To be able to demonstrate an understanding of: The extent of the waste of UK tax breaks How the changes to dividend taxation affect Director remuneration strategy How corporate cash can be utilised in a more tax efficient manner Budget 2016 overview 3
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Budget 2016
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Budget 2016 LISA CGT ER
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£500 Salary Sacrifice SDLT Budget 2016
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UK Tax Wastage
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Why are clients so wasteful?
Pensions ISA IHT CGT Source: unbiased.co.uk
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Areas of Tax Waste Area of Wastage 2014 2015 2016 Pension Tax Relief
£2.9 billion £1.9 billion ISA Allowance £1.1 billion £1.3 billion IHT £530 million £550 million £595 million CGT £154 million £158 million £208 million Source: unbiased.co.uk
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Corporate Cash
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Cash holdings in UK SMEs
£157bn £89.6bn £67.4bn
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Cash holdings in UK SMEs
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Surplus cash - concerns
Low interest rates Volatility CGT (Sale) Surplus cash IHT (Death) Corporation Tax (Ongoing)
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Why have large cash holdings?
Working Capital ER BPR
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IHT Business Property Relief
Ownership period test Investment business test Excepted assets test Barclays Bank Trust Co Ltd v IRC [1998] STC (SCD) 125 Relief available
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IHT – Excepted assets test
Surplus Cash Trading Co
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Case study – My Business Is My Pension Ltd
Surplus cash Turnover - £600,000 Profit £100,000 £350,000 Cash in Business £200,000 Surplus to requirements? Surplus cash … how best to extract company profits This example represents a typical situation. It is not related to any particular individual and it does not recommend that course of action
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Extracting profits – Pension Contributions and Carry Forward
Year 2014/15 2015/16 Pre Post 2013/14 2016/17 2017/18 Annual Allowance £50,000 £40,000 £80,000 £0 Inputs £25,000 £20,000 £35,000 ?? £65,000 Issue Action Here Here Unused £25,000 £20,000 £5,000 £0 £40,000 N/A Available – 2016/17 N/A Available – 2017/18 N/A
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Extracting Profits and the £5,000 Dividend Nil Rate Band
Additional rate taxpayers 38.1% Higher Rate taxpayers 32.5% Basic rate taxpayers 7.5%
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How Dividends are paid (2016/17)
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How Dividends in excess of the £5000 DNRB are paid
All figures rounded to nearest £
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Dividends received from 6 April 2016
£21,667 £25,250
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Shareholder Dividends
Tax Efficient Salary / Dividend Combination Employee Salary £0 to £8,060 £8,060 to £8,112 £8,112 to £11,000 Corporation Tax 0% Employee PAYE Employee NI 12% Employer NI 13.8% Shareholder Dividends £0 to £8,060 £8,060 to £8,112 £8,112 to £11,000 Corporation Tax 20% Further Tax to pay below HRT threshold 0%
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Shareholder Dividends
Tax Efficient Salary / Dividend Combination Employee Salary £0 to £8,060 £8,060 to £8,112 £8,112 to £11,000 £11,000 to £16,000 Corporation Tax 0% Employee PAYE Employee NI 12% Employer NI 13.8% Shareholder Dividends £0 to £8,060 £8,060 to £8,112 £8,112 to £11,000 £11,000 to £16,000 Corporation Tax 20% Further Tax to pay below HRT threshold 0%
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Shareholder Dividends
Tax Efficient Salary / Dividend Combination Employee Salary £0 to £8,060 £8,060 to £8,112 £8,112 to £11,000 £11,000 to £16,000 £16,000 + Corporation Tax 0% Employee PAYE Employee NI 12% Employer NI 13.8% Shareholder Dividends £0 to £8,060 £8,060 to £8,112 £8,112 to £11,000 £11,000 to £16,000 £16,000 + Corporation Tax 20% Further Tax to pay below HRT threshold 0% 7.5%
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Watch access to pension and MPAA
Extracting company profits – remuneration strategy 3 company owners each have £100,000 profit available for remuneration Employers NI Corporation tax Company Employer pension contribution National Insurance Dividend Income Tax Salary Individual Profit extracted £11,142 £0 All salary £5,110 £24,743 £88,857 £59,004 £0 £20,000 All dividends £80,000 £14,050 £65,950 £0 All pension £100,000 Watch access to pension and MPAA 20% £85,000 40% £70,000 45% £66,250
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potential HICBTC or PA Benefit
Extracting company profits – dividend swap Salary & Dividend & Pension up to Annual Allowance £8,112 £41,510 £40,000 SALARY DIVIDENDS PENSION BANK £45,439 HMRC £14,561 £100,000 profit available for remuneration – 2016/17 SALARY £8,112 £73,510 DIVIDENDS £0 PENSION Salary & Dividend BANK £67,039 HMRC £32,961 DIVIDEND SWAP? Before After Bank £67,039 £45,439 £21,600 Pension £40,000 £0 @20% = 57.41% @40% = 29.63% RISK FREE RETURN? Reduced Income has potential HICBTC or PA Benefit £40,000 @ 20% = £34,000 @40% = £28,000
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What about OEIC or Share holders?
£144,509 The chart shows the levels of dividend yield and investment values that would result in annual payments of £5,000
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Order of income Onshore bond gain Capital Gains Onshore bond gain
Salary Salary Dividend income Pension Income Pension Income Offshore bond gain Offshore bond gain Savings interest Dividend income Savings interest Capital Gains
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Income tax – how tax rates and bands apply
Order of taxation by income type Tax Rates & Bands 2016/17 Capital Gains Additional Rate Band (45% tax; 38.1% dividends) Excess over £150,000 Chargeable Event Gains (slice) Higher Rate Band (40% tax; 32.5% dividends) Next £118,000 Investment Income Savings Income Basic Rate Band (20% tax; 7.5% dividends) Next £32,000 Savings Income ( 0% tax) £5,000 Earned Income Personal Allowance (no tax) £11,000
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Income Taxation 2016/17 – Salary and Dividend
Total £46,375
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Tools and Support
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Extracting Company Profits Tool
For Adviser Use Only
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Summary The UK taxpayer continues to waste numerous tax breaks
Assess cash holdings within businesses Could it be considered an Excepted Asset? Consider methods of tax efficient extraction Look to Professional connections Consider your own business and remuneration strategy
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To be able to demonstrate an understanding of:
Learning Objectives To be able to demonstrate an understanding of: The extent of the waste of UK tax breaks How the changes to dividend taxation affect Director remuneration strategy How corporate cash can be utilised in a more tax efficient manner Budget 2016 overview 35
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