Autumn Budget | Issues affecting Owner-Managed Businesses

Optimal drawing strategies for Owner-Managers (from April 2018)

The personal allowance will increase by inflation to £11,850 from April 2018.

Likewise, the higher rate threshold for Income Tax will increase to £46,350.

The basic, higher and additional rates of Income Tax will remain at 20%, 40% and 45% respectively, with the exception of dividends (remaining at 7.5%, 32.5% and 37.5% respectively).

For the majority of director/shareholders, the following table shows the expected optimal levels of drawings from April 2018.

 

All £’s

2018/19

 

Monthly

Annually

Salary

700

8,400

Dividends

3,162.50

37,950

Total

3,862.50

46,350

 

However, due to the change in the way in which dividends are now taxed, the above level of dividends will result in an additional Income Tax liability of £2,437.50, payable through Self-Assessment.

Drawings above this level will result in tax liabilities of at least 32.5% of the additional amount drawn.

The above figures presume no other sources of income personally. Owner-managers who are also self-employed, or who have significant levels of income from other sources, should contact their Principal Adviser for further advice on their optimal drawings strategies from April 2018.

When drawing dividends, make sure you complete the correct paperwork.

 

Dividend allowance reduction

With effect from 6th April 2018, the tax-free dividend allowance will be reduced from £5,000 to just £2,000, which could mean additional tax of £225 for a basic rate taxpayer, or £975 for a higher rate taxpayer.

There are several options to reduce the impact of this additional tax charge, including additional pension contributions, or tax-incentivised investments such as VCT’s and EIS’s. However, it would be wise for any potential investors to consider the investment risk of these types of investments and speak to an Independent Financial Adviser prior to making any investments.

Please contact your Principal Adviser if you would like to be put in touch with one of the IFA’s at A4G Wealth.

 

Tax on private use of company vehicles

Those readers who desire an electric vehicle will have been given a small boost with the announcement that recharging your vehicle using your business’ electricity will no longer carry a benefit in kind charge.

Whilst not particularly costly previously, the calculation of this tax charge was very complex, so it is a relief to see this removed with effect from April 2018.

Drivers of diesel cars not meeting the RDE2 standard may wish to consider electric vehicles in the future due to the 1% increase on the rate applied to the list price of the car for the purposes of benefits in kind.

For example, a diesel car with an original list price of £50,000 and CO2 emissions of 135g/km will produce an Income Tax charge for the employee of £6,200 in 2018/19 for a higher rate taxpayer from April 2018 (excluding fuel), with a tax reduction for the employer of only £354.

A similarly priced electric vehicle will incur an Income Tax charge for the employee of £2,600 in 2018/19, with a tax reduction for the employer of £9,432 in the year of purchase (but not each year thereafter).

Please speak to your Principal Adviser if you are considering a purchase of a new vehicle.

 

Making Tax Digital

As previously announced, the introduction of Making Tax Digital will be delayed for many who would have been affected. However, VAT registered businesses will be required to keep digital records and submit their VAT returns from these digital records from April 2019.

A4G is advocating early adoption of digital cloud based bookkeeping packages, both in order to prepare for the above deadline but also to help provide you with better information about your business.

To find out more, why not come along to our February seminar ‘Why thousands of businesses are leaving Sage (and why you should be thinking about it)’

 

National Living Wage

From April 2018, individuals aged 25 and over will be entitled to a National Living Wage of £7.83 – a rise of 33p per hour.

The National Minimum Wage will continue to apply for individuals under 25 years of age, with the rates increasing from April 2018 as follows:

  • 21 to 24 year olds will increase by 33 pence to £7.38 per hour
  • 18 to 20 year olds will increase by 30 pence to £5.90 per hour
  • 16 to 17 year olds will increase by 15 pence to £4.20 per hour
  • Apprentice rate will increase by 20 pence to £3.70 per hour

 

VAT and digital platforms

Following speculation in the press prior to the Budget, Philip Hammond confirmed that the VAT registration threshold will remain at £85,000 for the next two tax years, despite this being much higher than most other European countries.

However, in order to cut down on perceived VAT fraud from businesses who supply goods via digital platforms, such as Amazon Marketplace or Ebay, digital traders may find themselves subject to greater review by the marketplaces themselves as the Chancellor announced that they would become joint and severally liable for any VAT fraud that is committed via those platforms.

Please contact your Principal Adviser if you are seeking to start an online business of this nature.

 

Infrastructure and Training / Research & Development

Mirroring the Spring Budget announcements, further investments in infrastructure and innovation totalling more than £31bn were announced with key areas being:

  • Promotion of Technological Innovation, through enhanced access to funding and grants
  • Planning reform to promote the speed at which new housing is built
  • Improvements to transport infrastructure, electric vehicle charging points and autonomous vehicles
  • Doubling of EIS investment thresholds for both individuals and many businesses raising finance
  • Digital infrastructure, 5G networks and artificial intelligence
  • Further investment in maths and computer science in schools
  • Digital training programmes to support workplace learning

Any businesses involved in any of these areas would be well advised to seek out any opportunities that they may be able to find as a result.

Businesses involved in the development of science or technology may also have heard of the increase in the Research & Development Tax Credit. However, this announcement is an anomaly for small businesses who already benefit from a more generous system. Take a look at Research and Development Relief for more information.

 

Should you incorporate?

No changes were announced in respect of Corporation Tax with the rate of Corporation Tax remaining at 19%, and expected to fall further to 17% from April 2020.

Sole traders and partnerships may therefore seek to incorporate rather than remain as self-employed to take advantage of both limited liability and the reduction in the tax rate.

Despite the reduction in the dividend allowance from April 2018, many self-employed individuals with earnings above c£40,000 may find themselves better off through incorporation.

If you are currently trading as a sole trader or partnership, and wish to consider whether incorporation is right for you, why not give one of our Principal Advisers a call?

 

Off-Payrolling and IR35

As predicted in our 2017 Spring Budget coverage, the Government is to consult into the possible extension of the ‘Off-Payrolling’ legislation currently in place in the public sector being extended to the private sector.

Off-Payrolling legislation is an extension of the legislation commonly known as IR35 which potentially affects anyone providing their own labour through a limited company.

However, whereas IR35 has traditionally left the taxpayer to self-assess the need to apply IR35 – and essentially draw all of their income as salary from the limited company, ‘Off-Payrolling’ transfers the responsibility to their client. This is thought by the Government to force many contractors into additional tax liabilities.

If you are currently providing your own labour to your clients, it would be recommended that you undertake a review of your existing working arrangements to ensure that you are not considered a ‘deemed employee’ under the IR35 or ‘Off-Payrolling’ rules as this could have a substantial impact on your tax affairs.

If you would like to discuss your own circumstances further, please contact Janice Offer.

 

Business rates

Another active area for the Chancellor over the last couple of years, business rates face a few further changes although mainly for the good:

  • From April 2018, the rate of business rates will be increased by the rate of CPI inflation, which is usually lower than RPI (e.g. currently CPI is approximately 3% vs 4% for RPI). This change is being brought forward from April 2019
  • The so-called ‘Staircase Tax’ where businesses sharing commercial premises faced higher business rates is to be repealed and retrospective refunds raised back to April 2010

One possible negative announcement was made that revaluations for the purposes of business rates will be every 3 years rather than every 5 years, with the possibility that rising commercial property prices will lead to more regular increases in business rates. Of course, should property prices fall, the reverse may also be true!