Chancellor George Osborne’s latest Budget speech contained a wide range of new tax policies and announcements. But what did the announcements in the Summer Budget actually mean for those running a small business? Emily Coltman FCA, Chief Accountant at FreeAgent, takes a look at the implications for small businesses.
Double whammy for one-person limited companies
Many limited companies in the UK have only one director, who is also the only shareholder of that company, and does not employ anyone else.
The Budget announced two measures which will increase the tax bill for these companies and their directors.
1. Employment Allowance changes
The Employment Allowance, which currently allows most employers to reduce their employer’s National Insurance bills by £2,000 a year, is to be withdrawn from companies where the director is the sole employee, as from April 2016.
For other employers, however, the Employment Allowance will increase to £3,000 from April 2016.
2. Amendments to dividend tax regime
At the moment, if you are a basic rate taxpayer, you pay no additional tax on dividend income, because dividends are currently treated as paid after a 10% tax credit has been applied. Many sole director/shareholders choose to have the company reward them with a mixture of salary and dividends in order to take advantage of this.
The dividend tax regime is changing from April 2016; the 10% tax credit will be replaced by a £5,000 dividend income allowance. Any dividend income over that level will be subject to income tax at the following rates:
– 7.5% for basic rate taxpayers
– 32.5% for higher rate taxpayers
– 38.1% for additional rate taxpayers
This, particularly when coupled with the withdrawal of Employment Allowance for one-person limited companies, could result in significant increases to tax bills when the company and its director are considered together. The Budget report specifically says that one aim of the changes to the dividend tax regime is to reduce so-called ‘Tax Motivated Incorporation’ in order to “start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities”.
Annual Investment Allowance increase
The Annual Investment Allowance (AIA), which gives businesses 100% tax relief on the cost of most new equipment, has fluctuated considerably since its introduction, from £25,000 to £500,000. AIA is to be set permanently at £200,000 from 1st January 2016.
Corporation tax rate cuts
The overall rate of corporation tax is to be cut to 19% in 2017 and then to 18% in 2020.
Statutory exemption for trivial benefits in kind
If an employer provides trivial benefits for its employees, costing under £50 per employee per year, these won’t be subject to tax and National Insurance and won’t have to be reported on forms P11D.
Areas to be reviewed
In addition to these changes, the Chancellor also announced that the following areas will be reviewed:
This has been mentioned in earlier budgets. We can expect a discussion paper on this subject “shortly”.
The Office for Tax Simplification is to be commissioned to review this.
A consultation will take place in Autumn 2015 on the subject of abolishing Class 2 National
Insurance and reforming Class 4 National Insurance.
The Office for Tax Simplification is also commissioned to review the taxation of small companies. It will be interesting to see what other recommendations they have on top of the changes that were announced today.
HMRC has been asked to “start a dialogue with business on how to improve the effectiveness of existing IR35 legislation”. It’s interesting that the government appears to be opting for improving the existing rules rather than starting again with a different set.
The government has promised that “a roadmap” will be published later this year, after discussions between HMRC, businesses and software providers about how reporting and payment of taxes can be integrated with day-to-day business processes to allow digital reporting to replace the tax return.
This Budget is something of a mixed bag for businesses. The increases to the Employment Allowance and Annual Investment Allowance are positive for larger businesses, but small businesses will be hit by the changes to the dividend tax regime and the loss of the Employment Allowance for some limited companies. To find out more about the announcements made in Budget, you can read the full report.
*Emily Coltman FCA is Chief Accountant at FreeAgent, who provide cloud accounting software for micro-businesses, freelancers and their accountants. Check out their crowdfunding campaign with Seedrs here.