If you’re the sort of person who usually runs a mile from budget tax updates, you do need to read this as there are some fundamental changes happening that will affect us all. I’ve tried hard to make it easy to get to grips with.
I know you’ll have had the accountants’ updates, but I just wanted to pull together the areas that directly affect the small business owner hopefully in way that’s easy to understand. It’s taken a fair bit of digging into the details of the budget documents to get all the facts together. It’s important to know that the full detail of this budget won’t emerge for another week yet, so your accountant won’t have the answers to what we do about this just yet.
Obviously I’m no tax expert and this is my interpretation as a business owner (and sort of accountant!)
Tax on dividends
This is the really big one. For as long as I can remember the government has been talking about attacking dividends, mostly to clamp down on people abusing the system by putting their spouse “on the books” when they don’t really work there. However they also claim they’re correcting “an unfairness” in the way that we pay ourselves as business owners.
In a nutshell they want to force us back onto payroll where we’ll pay National Insurance and get no benefit of being a business owner. I believe that this is just the start and we’ll see tax on dividends stealthily increase until there’s no benefit to paying dividends. Clearly this goes to the heart of the risk and reward principles that drive us as entrepreneurs.
As a quick recap, most small business owners pay themselves the tax free allowance through payroll, and the rest of their earnings come out as dividends. This means we avoid paying national insurance. Because our profits are taxed at 20% before we take our dividends, the dividends are deemed to have been taxed already. We only pay extra tax if our earnings go into the higher rate tax bracket.
From tax year 16/17 things are changing. We’ll be able to earn £5k of dividends tax free, but then we’ll pay 7.5% tax up to the 40% bracket, then 25% -32.5% after that. Think about that for a minute. We already pay tax on those profits at 20%. This is the same rate that employees pay tax at the basic rate. So we’re paying 27.5% on that income. Ok so we’ve still got the national insurance benefit but that’s rapidly being eroded.
Being rather sad I’ve been going through the budget spreadsheet and was shocked to see the government plan to raise £2.54bn from this tax in 16/17. This is the second highest gain in their budget, second only to their savings in the universal tax credit.
I see this as a fundamental attack on business owners and business growth. Although it’s been on the agenda for years no one saw this coming. I really didn’t think they would so directly attack the key driver of the economy. We have to remember as well that the long term survival rate of small businesses is too low and I wonder how many of them will be driven under by these and the other tax increases we’re facing.
I’m sure when the full detail comes out the accountants will be working out the best mix of payroll and dividends and I’ll share anything I find out with you in future weeks. There’s no information yet on when we’ll have to pay this tax, ie monthly or annually. One thing is for sure, we need to start planning for this tax right now.
Corporation tax
Yippee, we’re getting something back. But before you get too excited this change doesn’t kick in until 17/18. The corporation tax rate will fall from 20% to 19%, and then to 18% in 20/21.
I’ve been through and done calculations on some of my clients and the corporation tax saving is between 10% and 20% of the dividend tax, so don’t think that the corporation tax reduction will cover the dividend tax.
CT payment date
I noticed that they are going to make large companies pay their corporation tax close to their year end, rather than 9 months later. One to watch, as I could foresee them introducing this for small companies later down the line. Even more reason to make sure your tax is put away every month and not used for cashflow.
Annual employment allowance
This is that rather handy £2k NIC credit we have been getting in April the last 2 years. This is increasing to £3k from next year. The point of this is to encourage us to employ staff. Nice.
However, if you’re a sole director company you won’t get this anymore. We think this means if you don’t have any staff, but this isn’t entirely clear yet.
IR35
This is something else that’s been rumbling in the background for years and now they’re clamping down on this again. IR35 is the legislation to stop people who are really employees and work for one company, setting up a limited company to get the tax benefits and travel / subsistence tax breaks. (Often known as umbrella companies) I’m guessing this is connected to the single director company not being able to get the £3k employment allowance.
Annual investment allowance
Good news here, the annual investment allowance will be set at £200k from January 2016. This means you can get 100% tax relief on fixed assets you buy up to that limit each year.
Insurance Premium Tax (IPT)
Another kicker, the tax that is automatically added to all insurance is increasing by 3.5% to 9.5% in November this year. For some companies who have hefty insurance costs this is going to hurt. For one of my clients this is going to cost an extra £5.5k a year.
Minimum wage & living wage
And yes, more increasing costs. The minimum wage is going up 10.7% from £6.50 to £7.20 in April 16, and then rising to £9.00 by 2020 – this will be called the “living wage”
I can’t disagree with paying staff a fair wage, but we’re being asked to absorb a lot of extra cost when the economy is only just recovering. The Confederation of British Industry thinks this is going to cost at least 60,000 jobs and I can see why.
In summary
- Dividends – we’re all got to pay more tax from next year
- Corporation tax – going down from 17/18 to 19%
- Annual Employment allowance – many of us will get an extra £1k
- Annual investment allowance of £200k – incentive to buy capital equipment (if you can afford it – don’t do it just to get tax relief)
- Insurance is going up by 3.5%
- Wages are going up!
Lots more detail to emerge on these issues so watch this space.