This is probably the most significant budget for small business in many years and what follows is our summary of the announcements most likely to affect small business owners. The article below gives our thoughts on the changes and what it means for small business.
Dividends - we start with probably the biggest change for small business owners which is a change in the way dividends will be taxed. From next April, the tax credit on Dividends will be scrapped and the following new taxation introduced. The first £5,000 will be tax free. Dividends in excess of this allowance will be taxed at 7.5% for Basic Rate taxpayers, 32.5% for Higher Rate taxpayers and 38.1% for Additional Rate taxpayers.
For Company Directors this is a major change in personal tax and effectively ends a tax incentive to earn through dividends vs profit as a sole trader. We estimate around £2,000 increase in personal tax for Basic Rate Company Directors who have been using dividends as their main form of earning from the companies they run.
Personal Allowance - the Government will be increasing the allowance up from £10,600 to £11,000 in 2016 which is in line with Conservative Party election promise to increase the personal allowance to £12,500 by 2020.
Tax Thresholds - the Higher Rate threshold will increase from £42,385 to £43k in 2015-16.
Inheritance Tax - from 2017 the Inheritance Tax threshold will increase to £500k from £325k currently which when combined by a married or civil partnership couple amounts to the headline figure of £1million.
Tax Credits - from 2017 Child Tax Credits will be restricted to two children for children born from Apr 2017.
Pension Contributions - anyone earning over £150k will have pension contributions, currently at a £40k maximum, restricted from Apr 2016.
Corporation Tax - the Chancellor announced reductions in Corporation Tax down to 19% in 2017 and 18% by 2020.
Employment Allowance - in another significant development for small business owners, the Chancellor announced that from 2016 the Annual Allowance will increase to £3k but will be no longer be given to Directors who are sole employees of their companies.
Buy to Let – From Apr 2017 rules on buy to let taxation are changing. Relief on the costs of finance (ie interest payments) is being phased out over four years. This may make some buy to let investments unprofitable and it is recommended that anyone with buy-to-let investments begin tax planning for this change. Wear and Tear Allowance is being withdrawn to be replaced by relief for the cost of actual replacements.
Goodwill Amortisation – From 8 July 2015 Corporation Tax relief on the purchase of Goodwill has been curtailed.
The View Ahead
As well as the above announcements the Government has indicated that it will be looking at and bringing in changes in the following areas:
- Tax Relief on Travel and Subsistence
- Simplifying Taxation for Small Business
- Self Employed Class 2 National Insurance Contributions
- Simplifying Employee Expenses and Benefits