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…