Issues affecting Owner Managed Businesses - March Budget 2016

Optimal drawing strategies for owner-managers

As previously announced, the personal allowance increases to £11,000 from April 2016, with a further increase to £11,500 from April 2017.

From April, the higher rate threshold for Income Tax will increase to £43,000, and then onwards to £45,000 a year later.

The basic, higher and additional rates of Income Tax will remain at 20%, 40% and 45% respectively, with the exception of dividends. The full list of 2016/17 tax rates can be found here.

For the majority of director/shareholders, the following table shows the optimal levels of drawings from April 2016.

 

All £’s

2016/17

 

Monthly

Annually

Salary

670

8,040

Dividends

2,910

34,920

Total

3,580

42,960

 

However, due to the change in the way in which dividends will now be taxed from April 2016, the above level of dividends will result in an additional Income Tax liability of £2,022, payable through Self-Assessment. See below for further details on the changes.

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 2016.

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

 

Taxation of dividends

As we have widely promoted since the announcement last Summer, from April 2016 the current dividend tax credit system will be abolished. A new system of tax rates will then apply to any dividends received.

All individuals will receive a £5,000 tax free allowance on dividends, in addition to their Personal Allowance. However, tax will then be payable on any dividends above this amount, dependent upon their overall level of income.

The tax rates to apply will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. This will increase the personal tax payable for any owner-managers of limited companies by approximately 7.5% compared to the outgoing system.

Whilst many will find that it is still beneficial to trade through a limited company structure, most will not wish to pay the additional tax.

There are several options on how to potentially mitigate the additional tax arising from the change in dividend taxation which will be discussed in our upcoming webinar on Thursday 24th March at 1pm. To reserve your place on the webinar, please book here.

 

Taxation of ‘overdrawn’ Directors Loan Accounts

Technically known as ‘loans to participators’, loans or advances made to an owner-manager from a limited company are subject to a temporary tax charge. This is currently 25% and is payable by the company. This tax is then repayable to the company upon the repayment of the loan.

This was a potential alternative to higher rate taxpayers looking to avoid the increased dividend tax regime. So to mirror the increase in the dividend rates, this charge has also been increased to 32.5% on any loans or advances made from 6th April 2016.

 

Employer’s National Insurance Exemptions

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

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).
  • From 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 2016, individuals aged 25 and over will be entitled to a new National Living Wage of £7.20.

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 25 pence to £6.95 per hour
  • 18 to 20 year olds will increase by 25 pence to £5.55 per hour
  • 16 to 17 year olds will increase by 13 pence to £4.00 per hour
  • Apprentice rate will increase by 10 pence to £3.40 per hour

All future amendments to the National Living Wage or National Minimum Wage will take place from April each year, effective from April 2017.

 

Travel and Subsistence Relief for Personal Service Companies

If you are currently supplying your own labour through a Personal Service Company (PSC’s), or an Umbrella Company, you are using what is known as an ‘Employment Intermediary’.

Enhanced rules for the reporting of Employment Intermediaries were brought in from April 2015. This meant that those companies using the services of individual through PSC’s or Umbrella Companies are now required to report them to HMRC quarterly.

From April 2016, any individual whose PSC is caught by these rules will no longer be able to claim tax relief on their travel to/from home to work or subsistence costs.

If you are using a PSC and would like to discuss your potential tax risks associated with the legislation commonly referred to as IR35, please contact one of our Principal Advisers who will be able to assist.

 

Business Rates Reform

Often quoted as having a greater effect on business profits than Corporation Tax, there were several changes to Business Rates announced in the Budget, with the main announcements 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.

 

Stamp Duty Land Tax on Commercial Property

Following on from the scrapping of the ‘slab rate’ basis for charging Stamp Duty Land Tax (SDLT) on residential property, the way in which SDLT is calculated on commercial properties will change with effect from 17th March 2016.

The new rates will be applied on a proportional basis at the following rates:

 

Proportion of purchase price

SDLT Rate

to be applied

From

To

0

150,000

0%

150,001

250,000

2%

250,000

 

5%

 

For example, the purchase of a commercial property for £200,000 prior to 17th March 2016 would have incurred an SDLT charge of 1% on the whole value (£2,000) whereas the new rules will result in an SDLT charge of 2% on the proportion of the property value in the 2% band only (£1,000).

 

Future Corporation Tax Rate Reduction

As part of the widely quoted ‘Business Tax Road Map’, it was also announced that Corporation Tax rates will be lowered further than previously set out.

It is now therefore expected that the current Corporation Tax rate of 20% will be reduced to 19% from April 2017 and to 17% - rather than 18% - from April 2020.

 

Self-Employed National Insurance Reform

Previously announced in the two Budgets of 2015, from April 2018, Class 2 National Insurance will be abolished. This will save self-employed individuals, earning more than £5,965, around £145 per annum.

In the interim, Class 2 National Insurance will be payable through your self-assessment tax return alongside Income Tax and Class 4 National Insurance on your profits. This is instead of the six monthly bills or direct debit payments made previously.

However, with the abolition of the Class 2 National Insurance, the government will be consulting on possible changes to Class 4 National Insurance to take effect from April 2018, so don’t spend the savings just yet….