Wednesday’s Budget was pitched as “A Budget for the next generation” and although some of the changes, such as the new dividend tax rules, had already been revealed in the Autumn Statement, there were still a few surprises such as a reduction in capital gains tax and corporation tax. Small businesses will benefit from these changes as the Chancellor redistributes around £9bn from large companies to help smaller businesses. Business rates relief will also more than double to £15,000, meaning that over 600,000 small businesses will not pay business rates at all.
However, it’s not all good news for small businesses as the new dividend tax rules being introduced from next month will see an increase in the amount of personal tax payable by many of the owners of these small businesses. The changes to the dividend tax rules are aimed directly at small companies who save tax by paying directors/owners a small salary plus a larger dividend amount. Over the years governments have provided big tax incentives to encourage the self employed/sole traders to incorporate their businesses; which caused a wave of incorporations. While there are a number of different reasons to incorporate a business, many did so purely to save tax. However, many of these smaller businesses, particularly micro businesses, may well find that the additional burdens and restrictions placed on their companies, and on them as directors, outweigh the relatively smaller tax savings now available.
As an example, if a small business owner has income in 2016/17 of £43,000 and takes a small salary of £8,000 and distributes the balance of £35,000 in dividends, their personal tax bill will be £2,025. Under the old dividend rules there would have been no personal tax to pay at all.
Below is a summary of the main changes affecting individuals and small businesses:
|Rates and allowances
|Income tax rates – (non-dividend income)
|10% lower rate tax – savings rate only
|Up to 5,000
|Up to 5,000
|20% basic rate tax
|Up to 32,000
|Up to 31,785
|40% higher rate tax
|32,000 – 150,000
|31,786 – 150,000
|45% additional rate tax
|Personal allowance those born after 5 April 1948
The main rate of corporation tax is 20% and from April 2017 will be reduced to 19%.
Annual Investment Allowance
The annual investment allowance is £200,000 per annum and is available for companies and for unincorporated businesses. It applied from 1 January 2016.
Tax is payable on dividends over £5,000 at the following rates:
7.5% on dividend income within the basic rate band
32.5% on dividend income within the higher rate band
38.1% on dividend income within the additional rate band
Personal Savings Allowance
A basic rate taxpayer will be able to receive up to £1,000 of interest per year tax free on their savings.
A higher rate taxpayer will be able to receive up to £500 of interest per year tax free on their savings.
An additional rate tax payer will not have a Personal Savings Allowance.
Any amount received above these limits will be charged at the marginal rate.
Directors overdrawn loan account tax increase
Rate of tax charged on loans to participators increases. From 6 April 2016 the rate of tax charged on loans to participators (currently 25%) will increase to 32.5%.
Capital gain tax reduction
Legislation will be introduced in Finance Bill 2016 to reduce the 18% and 28% rates in those provisions to 10% and 20% respectively, subject to exclusions for chargeable gains on disposals of residential property.
Restriction on mortgage interest deduction
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their rental profits. The relief in respect of finance costs will be restricted as follows:
|25% basic rate
|50% basic rate
|75% basic rate
|100% basic rate
The end of wear and tear allowance
From 5 April 2016 wear and tear allowance and the renewable allowance for property business will be replaced by a system allowing landlords of residential property to deduct only the actual costs incurred on replacing furnishings in the tax year. Capital allowances for furnished holiday lets will not be affected.
Lifetime ISA for first home purchases
From April 2017, any adult under 40 will be able to open a new Lifetime ISA. Up to £4,000 can be saved each year and the government will pay in a 25% bonus on these contributions at the end of the tax year. The funds, including the government bonus, can be withdrawn from the Lifetime ISA from age 60 for any other purpose.
Entrepreneurs’ relief is available to external investors in unlisted trading companies, where a gain is made on Goodwill on Incorporation and on an ‘associated disposal’ of a privately held asset when the accompanying disposal of business assets is to a family member.
The government will introduce in Finance bill 2017 legislation that will move the liability to pay the correct employment taxes from a worker’s own company to the public sector body or agency / third party paying the company.