The annual dividend allowance introduced last year will remain at £5,000 for the 2017/18 tax year but then reduce to £2,000 from April 2018. To illustrate the impact, a director for example, taking a £100,000 dividend would be £6,300 worse off under the new rules.
A pension contribution remains the most tax efficient way of extracting profits from a business. Just like a dividend, an employer pension contribution does not attract National Insurance and is usually an allowable deduction for Corporation Tax. Even better, if the director is aged 55 and over immediate access is available with 25% of the fund being available tax free.
Those reliant on dividend income in retirement should maximise contributions to stocks and shares ISAs.
Increased ISA Allowance
The ISA allowance will increase from £15,240 to £20,000 per person from 6th April 2017 and limits for Junior ISAs and Child Trust Funds will increase from £4,080 to £4,128.
NS&I Investment Bond
The rate is 2.2% over a term of 3 years and will be available to purchase for a period of 12 months from April 2017 to those aged 16 and over. The minimum is £100 and the maximum limit is £3,000.
Couples who have not used this year’s ISA allowance could place a total of £70,480 in ISAs within the next month by utilising their annual allowances for both tax years. ISAs are tax free and unlike pensions any unused annual allowance cannot be carried forward, if you don’t use them you lose them!
The NS&I Investment Bond is only available via the internet, there is no option for regular contributions and with inflation officially expected to rise to 2.4% this year the rate of 2.2% may lose you money. ISAs have a higher limit, can invest in both cash and stocks and shares and will accept regular contributions. They are fully transferable on death to your Spouse and if stocks and shares make sense in the current climate you always have the option to transfer back to cash when interest rates rise. ISAs have to be the preferred savings vehicle.
Reduction in MPAA
The Money Purchase Annual Allowance (MPAA) will reduce from £10,000 to £4,000 from 6th April 2017 and will apply to those who have already triggered the MPAA as well as those who do so thereafter. The MPAA applies to those who access their pension benefits flexibly and will prevent the use of ‘carry forward’ once triggered.
Taking only tax free cash from a money purchase pension will not trigger the MPAA. Make full use of the ‘carry forward’ provisions before triggering the MPAA, which allows you to mop up your unused annual pension allowance of £40K, currently, from the previous three years. For example, and earnings permitting, an individual could contribute a total of £170,000 into a money purchase pension before 6/4/2017. Defined Benefit/Final Salary Pensions are not affected.