Budget 2015 – The End of Tax Motivated Incorporation?

The Summer Budget 2015 contained some key measures that were a thinly veiled attack on small business owners. What do you need to be aware of?

Dividends:
Perhaps the most controversial announcement was the overhaul of tax on dividend payments. From April 2016 the notional tax credit system (which sees basic rate taxpayers pay no tax on dividends) will be abolished & instead replaced by a new dividend allowance of £5,000. Any dividend payments received above that will be taxed at the following rates;

• 7.5% Basic rate taxpayer
• 32.5% Higher rate taxpayer
• 38.2% Additional rate taxpayer

Initially there had been some confusion as to how this allowance would work in practice but HMRC have confirmed that all taxpayers, regardless of their individual tax rate, will benefit from the first £5,000 of dividend income being tax free. Essentially it is a special type of personal allowance.

Small companies will be severely affected by this change. Those following the traditional accountant advice of taking a small salary & topping up to the basic rate tax band with dividends will potentially see their tax bill increase by up to £1,800 (enough to trigger payments on account).

Employment Allowance:
In a second swipe at micro companies, it was also announced that the allowance which reduces the Employers National Insurance liability by up to £2,000 per annum for companies will no longer be available where the only employees are the directors (one-man bands, husband & wife set ups etc.). This will come into effect from April 2016.

Goodwill Amortisation:
Finally, the announcement that there will be no allowable tax deduction for the cost of purchasing the goodwill element of another business or trade from 8 July 2015 will affect businesses that buy the trade of small competitors or retiring persons.

Conclusion:
Many small business clients are likely to be frustrated at these changes, with many commenting that the government have simply failed to recognise the financial risks that small companies have to take on.
It’s likely that small company client’s tax positions will worsen significantly next year.

Our client’s will be receiving detailed information on how the Budget changes will affect them, together with individual discussions so they can consider all options available to them.

For more information on the Taxation services we provide, please visit our Tax Compliance services page at https://www.emeraldaccountants.com/tax-compliance/.

If you require more detailed information on the Budget & the potential impact it could have on both you & your business then please contact us & we’ll be happy to help… Our client’s vouch for our service & we invite you to look at reviews from some of our customers here.

Please note that Emerald Accountants Limited shall not be liable for any loss or damage arising out of the use of any of the information disclosed in this article…

Budget 2015 – Small Firms Facing Tax Shake-Up

On 8 July 2015, The Chancellor delivered his budget to Parliament. Like all budgets there are ‘Winners & Losers’ but this Budget in particular has provided plenty ‘food for thought’ amongst accountants as we look at ways of minimising the impact to our clients.

Our main focus in this blog is regarding the impact the Budget will have on small firms & the shake-up within the taxation rules associated with it.

As such, one of the main advantages of incorporation was to reduce tax but the tipping point at which incorporation starts to deliver significant tax savings has clearly gone up. It looks as if incorporation at earnings even as high as £30,000 will now deliver a very marginal benefit.

Thinking of this in broad terms, the advantage of incorporation has been that much of the income could be received as a tax-free dividend. Of that £30,000, something like £20,000 could be taken as dividend (using the personal allowance to cover salary).

From the 6 April 2016 that £20,000 will create additional income tax of £1,125 (£15,000 x 7.5%) - Each taxpayer will receive a £5,000 tax free Dividend Allowance, hence the reduction to £15,000. That is a significant increase whereas, broadly speaking, the self-employed will see little change. Additional tax at that level would make incorporation much less attractive.

With the tax benefits of incorporating being reduced (& I expect them to be further reduced in the coming years) there is a lot to be said for them to remain as self-employed. Also it’s worth mentioning here that for self-employed people the view to incorporate generally reduced the need for payments on account upon cessation of their trade for the following tax year & as such provided those with a tax break period upon incorporation. With Dividend income to be taxed from 6 April 2016 this could potentially throw another spanner in the works for those considering incorporation at this time!

For those who are already incorporated, there will be different considerations. Some will be happy to operate in corporate form but others may start to wonder whether it is time to disincorporate.

So what do we say to clients about these changes & the further ones that are almost certain to come?

The first thing is to remind clients that the dividend tax does not come into effect until next year, so there is nothing to do immediately. For clients who are considering incorporation, it might be best to put any plans on hold until the position is clearer.

This is certainly the case if the benefits are only marginal or if there are concerns about the additional complexity. Clients will be forewarned that next year’s tax is likely to be higher than this year’s, despite all the talk of tax cuts in the Budget.

For those with significant income, where the dividend tax will make a big difference, we will start thinking about timing of dividend payments next spring to ascertain if more tax-efficient.

HMRC can be expected to look closely at the timing of dividends paid in March and April next year, so getting the paperwork right will be essential.

Our client’s will be receiving detailed information on how the Budget changes will affect them & advice also on how to tackle them as each case will differ dependant on their circumstance.

For more information on the Taxation services we provide, please visit our Tax Compliance services page.

If you require more detailed information on the Budget & the potential impact it could have on both you & your business then please contact us & we’ll be happy to help… Our client’s vouch for our service & we invite you to look at reviews from some of our customers here.

Please note that Emerald Accountants Limited shall not be liable for any loss or damage arising out of the use of any of the information disclosed in this article…