Issues Affecting Owner-Managed Businesses

Optimal drawing strategies for owner-managers

As previously announced, the personal allowance increases to £11,500 from April 2017.

Likewise, the higher rate threshold for Income Tax will increase to £45,000 as previously announced.

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 38.1%  respectively).

For the majority of director/shareholders, the following table shows the expected optimal levels of drawings from April 2017. The following will be confirmed following the Budget expected in March 2017.

 

All £’s

2017/18

 

Monthly

Annually

Salary

680

8,160

Dividends

3,070

36,840

Total

3,750

45,000

 

However, due to the change in the way in which dividends are now taxed since April 2016, the above level of dividends will result in an additional Income Tax liability of £2,137.50, payable through Self-Assessment.

The announcement of the alignment of the Employee’s and Employer’s National Insurance Thresholds is not anticipated to impact on the above.

The above figures presume that you have 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 2017.

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

 

Employer’s National Insurance Exemptions

Employers, with staff other than just a single director, will remain able to claim the new enhanced rate of Employment Allowance of £3,000 against their total Employer’s National Insurance liability after April 2017.

However, employers of younger workers can also claim further exemptions:

  • Since April 2015, employers of individuals under 21 have not been required to pay Employer’s National Insurance on earnings below the Upper Earning Limit (£43,004 in 2016/17; £45,032 in 2017/18).
  • Since April 2016, this exemption will be extended to apprentices under the age of 25 earning under the Upper Earning Limit.

If you would like to find out more about how apprentices could help your business grow, please contact Kirk Smith or Will Richardson of A4G Growth.

 

National Living Wage

From April 2017, individuals aged 25 and over will be entitled to a National Living Wage of £7.50 – a rise of 30p per hour.

The National Minimum Wage will continue to apply for individuals under 25 years of age, with the rates increasing from 1st October 2016 as follows:

  • 21 to 24 year olds will increase by 10 pence to £7.05 per hour
  • 18 to 20 year olds will increase by 5 pence to £5.60 per hour
  • 16 to 17 year olds will increase by 5 pence to £4.05 per hour
  • Apprentice rate will increase by 10 pence to £3.50 per hour

Any future amendments to the National Living Wage or National Minimum Wage will take place from April each year.

 

Salary Sacrifice

The Government understands that employers can choose to pay their employees in a number of different ways, with some impacting on the amount of tax payable.

As a result, from April 2017, salary sacrifice schemes, whereby the employee forgoes a proportion of their cash salary for other benefits such as health insurance, company cars, pensions, etc will be restricted to pensions, childcare, the Cycle to Work scheme and ultra-low emission cars only.

Most arrangements which are in place prior to April 2017 will be exempt from the changes until April 2018, although some (such as for cars and accommodation) will be protected until April 2021.

If you wish to discuss how you or your employees could benefit from Salary Sacrifice arrangements, please contact your Principal Adviser.

 

Infrastructure Investments and Opportunities

As the UK is defined as having a Productivity Gap (meaning that business is not as efficient as it could be) of 30% as compared to Germany and the US, a wide raft of investments totaling £23bn in Infrastructure and Innovation were announced, including the following:

  • Up to £2bn per year on Science and Technological Innovation by 2020/21
  • Up to £2.2bn per year for a Local Government Infrastructure fund in areas of high new housing demand
  • Up to £1.4bn per year for 40,000 new homes
  • Up to £2.16bn for transport improvements, primarily looking to combat congestion on the UK roads
  • £1bn per annum (rising to 1-1.2% of GDP from 2020) for investment in digital infrastructure and particularly 5G networks.

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 should also consider whether they are eligible for Research and Development Relief. Given the relatively low uptake of this relief, the Government is also looking to review this tax relief in order to make it more attractive.

However, is your business fit enough to take advantage of any potential opportunities? If not, perhaps you should consider your business plan and find the best way to maximise the potential of your business. Speak to your Principal Adviser to find out more.

 

Business Rates Reform

Confirmed in the Autumn Statement, but actually announced in the March Budget, there are several changes coming to Business Rates, with the main changes being:

  • Small Business Rate Relief will be permanently doubled to 100% in England with effect from 1st April 2017
  • Small Business Rate Relief will be available in full on properties with a rateable value of up to £12,000 with effect from 1st April 2017 (up from £6,000)
  • Properties with a rateable value of between £12,000 and £15,000 will be eligible for a reduced amount of rates relief
  • Increases in Business Rates from 1st April 2020 will be calculated with reference to the (usually) lower Consumer Price Index from the Retail Prices Index, meaning that increases will be in line with official inflation figures

To claim Small Business Rate Relief, you should contact your local council.

 

Corporation Tax Rates

It was confirmed that the rate of Corporation Tax will continue to fall as previously announced by George Osborne to 19% from April 2017, and 17% from April 2020.

This may mean that sole traders and partnerships with lower profits may seek to incorporate rather than remain as self-employed to take advantage of both limited liability and the reduction in the tax rate.

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?

 

VAT Flat Rate Scheme – Limited Cost Traders

A new 16.5% flat rate will be introduced in April 2017 for businesses declaring their VAT through the VAT Flat Rate Scheme, but who have limited costs.

‘Limited costs traders’ are defined as either spending less than 2% of their VAT inclusive turnover in an accounting period, or greater than 2% but less than £1,000 overall per annum.

The intention of this change is to remove the relatively high tax saving incentive for some ‘labour-only’ businesses of registering for the Flat Rate Scheme.

If you are currently using the VAT Flat Rate Scheme, or you have turnover of less than £150,000 excl. VAT per annum, and would like to know more, please give one of our team a call.

 

‘Off Payroll Working’ - Contractors working in the Public Sector

The so-called ‘off-payroll working’ reform consultations came to an end in the late Summer but unfortunately there was little further announced in the Autumn Statement. The sole exception was that the usual 5% allowance associated with IR35 contracts will not be available to Public Sector contractors.

If you are working as a contractor either directly for a public sector organisation, or through an agency, you should be aware that the Government is seeking to introduce a reform which will take the choice of whether you should remain treated as self-employed or employed for tax purposes out of your hands.

We will release further information on any announcements when they are made, but if you have any concerns in the meantime, please contact us.