Issue affecting Owner Managed Businesses

Changes to the taxation of Dividends

Perhaps the biggest surprise, but the most wide reaching announcement was the abolition of the Dividend Tax Credit system.

The Dividend Tax Credit System provided a non-repayable credit against a tax liability created in an individual’s name on a dividend received from a UK company.

From April 2016, the tax credit system will be abolished and replaced with a new system of tax rates which will apply to any dividends received.

All individuals will receive a £5,000 tax free allowance on dividends, in addition to their Personal Allowance, but will then pay tax 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, and will thus increase the personal tax payable for any owner-managers of limited companies.

Based on initial calculations, trading through a limited company will remain the most tax efficient business structure for the vast majority of owner-managers.

Further details on the likely increases in personal tax liabilities following this announcement and the options available to reduce the impact will be detailed in upcoming email newsletters.

Employer’s National Insurance Exemptions

Up until 5th April 2016, all employers remain able to claim the £2,000 Employment Allowance against their total Employer’s National Insurance liability.

From 6th April 2016, companies where the director is the sole employee will no longer be able to claim the Employer’s Allowance. This will have knock-on effects to the most effective remuneration strategies for all one-man band limited companies, and will be the subject of future email newsletters.

Those employers with more than a single director as the employee will however benefit from an increase in the Employment Allowance to £3,000 per annum from April 2016, which is intended to help to support businesses paying a new National Living Wage (NLW) – detailed below.

Employers of younger workers will also be able to claim further exemptions.

Since 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.

Given the exemptions above, would your business benefit from taking on apprentices, freeing your time up to concentrate on the growth of your business?

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)

The current AIA, set at £500,000, means that most businesses will obtain full tax relief on most assets purchased up to this value before 31st December 2015.

Whilst the AIA is now set to remain at £200,000 on a permanent basis from 1st January 2016, any businesses looking to incur capital expenditure exceeding £200,000 will benefit from much earlier tax relief.

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.

Corporation Tax rate reduced from 2017

In another surprise announcement from the Summer Budget, Corporation Tax rates are set to fall back to 19% from April 2017, and reduce further to 18% by 2020.

Whilst this will no doubt be a welcome announcement, the fall in the Corporation Tax rate will not completely compensate for the additional tax payable on dividends for most owner-managers.

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 2015 as follows:

  •  Adult rate (including individuals aged 25 and over until March 2016) will increase by 20 pence to £6.70 per hour
  • 18 to 20 year olds will increase by 17 pence to £5.30 per hour
  • 16 to 17 year olds will increase by 8 pence to £3.87 per hour
  • Apprentice rate will increase by 57 pence to £3.30 per hour