Issues Affecting Owner Managed Businesses

Optimal drawing strategies for owner-managers

As previously announced, the personal allowance increases to £10,600 from April 2015. The Budget announced further increases in the next 2 tax years to £10,800 and £11,000 from April 2016 and April 2017 respectively.

From April, the higher rate threshold will increase to £42,385, and then onwards to £42,700 in 2016/17 and £43,000 in 2017/18.

The basic, higher and additional rates of Income Tax will remain at 20%, 40% and 45% respectively. The full list of 2015/16 tax rates can be found here.

For the majority of director/shareholders, the following table shows the optimal levels of drawings from April 2015.

 

All £’s

2015/16

 

Monthly

Annually

Salary

883*

10,596

Dividends

2,383

28,596

Total

3,266

39,192

 

Drawing the salary shown above will result in additional National Insurance of £304.32 suffered by the individual payable over the period January-March 2016 and will be deducted from the figures marked * in those months. This means that over the period of the tax year a total of £38,959.68 can be received net before higher rate Income Tax is payable.

Companies that already incur Employer’s National Insurance of more than £2,000 will not be able to benefit from the Employer’s Allowance and will also suffer additional Employer’s National Insurance of £342.79 in the same months.

The company will save Corporation Tax of £511.20 on the additional salary drawn, resulting in an overall saving of between £168.41 and £511.20 for the company before any potential additional administrative costs.

Note however that the Corporation Tax saving will only be realised 9 months after the accounting year end, potentially leaving a small shortfall in cash-flow temporarily.

For those director/shareholders wishing to avoid the additional administration of making PAYE/NI payments in January-March 2015 which would not otherwise be due, the optimal drawings levels are as shown below:

 

All £’s

2015/16

 

Monthly

Annually

Salary

670

8,040

Dividends

2,575

30,900

Total

3,245

38,940

 

 

Any dividends drawn over the above amounts will result in additional personal tax liabilities of 25% on the next c£96,850 per annum drawn in this manner, with 30.55% tax on further additional dividends above this.

In addition, where the amount of net dividends drawn is more than c£51,850 higher than the totals above, a further personal tax charge of up to £2,650 will be incurred due to the gradual reduction in the Personal Allowance for those individuals with gross income of more than £100,000 per annum.

In either case, the above figures presume that you have no other sources of income personally. Owner-managers who are also members of Limited Liability Partnerships, or who have significant levels of income from other sources, should contact their Principal Advisers for further advice on their optimal drawings strategies from April 2015.

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

Making use of the new tax-free savings rate

From April 2015, individuals with employment and self-employment income of less than the personal allowance and savings income of up to £5,000 will not pay any tax on these savings.

Therefore, by swapping £5,000 of dividends in the tables shown above for £5,000 of interest on monies loaned to your company, the company could save up to £1,000 in tax with no additional tax payable by you.

If you would like to find out more about this possible relief, contact your Principal Adviser.

For further ideas to minimise the tax on your drawings, please see this article.

Death of the Tax Return?

One of the widely reported announcements in the Budget was the abolition of the annual tax return for businesses and individuals alike.

Instead, a new digital tax account will be introduced providing continuous year round access for taxpayers to tweak their tax affairs on a regular basis ensuring that they are paying the correct amount of tax.

In addition, it is thought that the new system will allow taxpayers to set up regular payment arrangements for their tax liabilities, bringing a stop to difficult-to-budget-for lump sums.

How the new system – due in 2020 – will actually work is yet to be announced in very much detail, but watch this space!

In the meantime, if you find it difficult to plan for tax bills, perhaps you should consider how you could improve your management accounts.

 

Tackling ‘False Self-Employment’

Announced a few days prior to the Budget, from April 2015, businesses using third party subcontractors to complete contracts for clients will need to:

·         Apply PAYE/NI on any third party workers who are subject to supervision, direction or control, or

·         Submit a quarterly report to HMRC detailing those workers who the business has not deducted PAYE/NI from, along with the reasons why

 

This will increase the paperwork required to be kept for businesses using subcontracted labour. Penalties of at least £250 will be applied in the case of incorrect or late returns. The first return will be due by 5th August 2015.

We will be contacting all clients whom we believe to be affected by these new rules over the next few weeks. If you should have any concerns in the meantime, please contact us.

 

Employer’s National Insurance Exemptions

All employers remain able to claim the £2,000 Employment Allowance against their total Employer’s National Insurance liability, as referred to above. However, employers of younger workers can also claim further exemptions. 

From April 2015, employers of individuals under 21 will not been required to pay Employer’s National Insurance on earnings below the Upper Earning Limit (£42,380 in 2015/16).

From April 2016, this exemption will be extended to apprentices under the age of 25.

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.

Purchasing Assets - Annual Investment Allowance (AIA)

Businesses looking to purchase assets may wish to bring forward the purchase of these assets to before 31st December 2015.

The current AIA, set at £500,000, meaning that most businesses will obtain full tax relief on most assets purchased will cease on 31st December 2015. George Osborne announced that the AIA will not decrease back to £25,000 per annum from 1st January 2016, but any announcement on the future allowance was deferred until the Autumn Statement.

The cost of asset purchased that are not eligible or not made in time will only be deducted from taxable profits at the rate of 8% or 18% (dependent upon their type). Using the AIA effectively will have a major cash-flow benefit.

If you would like advice on raising finance for any asset purchase, please see here.

 

Research and Development Tax Relief

A prior announcement from the Autumn Statement 2014, but nevertheless still valid, any companies conducting Research & Development activities will be able to claim tax relief of 230% (of if loss making, a refundable tax credit of 14.5%) on qualifying expenditure incurred from April 2015.

This is a small increase in the tax savings available from this claim

Therefore, a company incurring £10,000 on eligible activities will be able to reduce their Corporation Tax liability by £4,600 by claiming this relief.

To see if you could be eligible, please contact one of our Partners or Principal Advisers.

 

Are Company Cars a good idea?

Continuing with a common theme of recent years, the Income Tax charge in running a car through a limited company will increase by 3% in 2019.

For the majority of business owners and employees though, it is already more expensive to run a car through a company, especially if considering the recent falls in fuel costs against the increasing benefits in kind. 

Drivers of low emission vehicles however will be pleased to hear that the benefit in kind rates will increase more slowly than previously announced, which may mean that a low emission company car is not out of the question.

 

To find out more, read Reducing tax on my vehicles or contact our Tax Manager, Janice Offer.