The Fizz! Blog

Claiming Capital Losses

If you sell assets like rental properties, shares or cryptocurrency at a profit, you have to consider whether you have Capital Gains Tax (CGT) to pay for the tax year.  But you might also have sold some other assets at a loss in the year - if so, you can deduct those losses from your profits to get to a net profit or loss for the year.

If you wind up with net gains, but they’re less than the Annual Exemption - this year, £12,300 - then there’s no CGT to pay and you move on.

If you wind up with net losses, then you get to hang on to them.  If, in a future year, you have net gains over the Annual Exemption, then you can set those old losses against them, using just enough to get down to the Annual Exemption and eliminate any tax that would otherwise be due, and carrying anything left forward still further.  It might be that you never have sufficient gains in a future year to ever use them, in full or at all, but they’re there if you do.

Capital losses are about to become more valuable, because the Annual Exemption is being cut sharply.  Next year, it’ll be only £6,000, the year after, £3,000.  That means that more taxpayers will be dragged into the CGT net.

There’s an easy trap to fall into.  In order to establish entitlement to most losses, you generally have to claim them within four years of the tax year they occur in (there’s a shorter deadline for some niche cases).  That could be on your Self Assessment Tax Return, if you have to submit one for the year, or you could just do it by letter or some other way.  But you have to somehow tell HMRC before that deadline.  We recently saw a case where someone had losses in 2013-14, and gains over the Annual Exemption in 2021-22.  Unfortunately, HMRC hadn’t been told about the losses, so it was too late for the taxpayer to take advantage of them.  Fortunately, the losses weren’t enormous.

A final consideration - you might need to make a judgement about how much effort you’re prepared to put into quantifying losses that you’re not certain will be useful.  If someone is pretty sure that they’ve got losses this year, but they’ll have to put research time into establishing the history of the share transactions, or pay an adviser to work out the actual loss, should they do it when they don’t anticipate having an opportunity to use the loss in future? To begin with they can kick the can down the road, by making a note for three years’ time to look at it again.  The point will come, though, where they have to make a judgement on whether to do the work before the deadline passes.

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A Fizz March update - further business measures (including IR35)

We send out an email update to all our clients each month; we don't usually post it here, but this is an update to this month's news that we sent out this morning...

We thought we’d be following up our Budget email with some further updates pretty soon, and here we are.  There were some more announcements last night.  On the lending and Business Rates items, there’s no detail yet about how things will work in practice, but we wanted to let you know about them as soon as we could.  If you’ve got immediate concerns about payment of tax due to coronavirus, HMRC have set up a helpline for businesses to call them (although we imagine you can expect a lengthy queue):

https://www.gov.uk/government/news/tax-helpline-to-support-businesses-affected-by-coronavirus-covid-19

At the moment, the people who don't really have much in the way of specific support are the self-employed, consultants, freelancers and the like, especially if IR35 wasn't a problem for you and you rent your home.  The Chancellor did say in the Budget that the government would make claiming Universal Credit "quicker and easier" (from which one would logically conclude that if and when things settle down they'll revert to making it slow and hard), but that's about it.  Supposedly there will be more announcements soon though, in which case we'll be emailing you yet again.

So, last night’s news.  The first thing is that the IR35 changes due to come in from 6 April have been postponed for a year.  This will not be of any help to contractors who’ve already switched to PAYE status in anticipation of the change, or end users like HSBC and Vodafone that had already stopped using contractors entirely.  But there are still plenty of contractors and freelancers wrangling over status and day rates with clients and agencies, so it’s one fewer thing to worry about for them.  Of course, IR35 still exists, and contractors remain responsible for determining their own status and paying employment taxes if they consider it appropriate.  But the compulsion for medium and large customers to make the call, which in practice they’ve largely been dealing with by forcing contractors on to PAYE or into umbrella companies (which is also PAYE) has been put back until 2021.

Next, the reduction in Business Rates for retail and leisure business was extended.  None of them will have to pay Business Rates at all in 2020-21.  Local authorities are supposed to get guidance from that from the government on Friday, probably you’ll hear from them some time after that.  Plus, the £3,000 cash grants that were to be given to similar businesses occupying commercial premises but not paying business rates to begin with have been increased – up to £25,000 in some cases.  And businesses in other sectors who similarly have premises but pay little or nothing in rates will also now get (smaller) grants.  Funding for that is supposed to be provided from some time in April, so don’t expect any money to appear in your bank account right now.

The announcement with a big number in front of it was £330bn of loans and loan guarantees to be made to businesses.  It’s said that these loans will be on attractive terms, but there’s no definition of what that represents right now.  This funding will supposedly start to become available next week.  Big companies will get money from the Bank of England, but you can expect most businesses to be getting such loans through more usual lenders.   Of course, a loan isn’t a grant, and in the long-term it won’t save a business that has been fatally compromised by the outbreak.  But for sound businesses that will be able to get back on their feet, but in the meantime need help to bridge a gap and cover wages and overheads, this is likely to be an attractive route to take.

And, on the domestic front, homeowners who are struggling to pay their mortgage will be eligible for a three-month payment holiday.  Note, though, that this isn’t a cost saving – interest will still be building up on the amount you owe, and you’ll still have to pay it all back in the end.  So it’s a cashflow break, but in fact you’ll wind up paying a bit more over the life of the mortgage as a bit more interest will be building up.  You wouldn’t just automatically take the holiday if you’ve got the ability to pay.

There’s some more info – and a recap on the things we’ve already told you about on Statutory Sick Pay and the like – here:

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

We hope that’s of some help and interest.  We’re happy to hear from you if you’ve any questions about it – but, again, do bear in mind that nobody can answer the question “how exactly will this work?” at this point, because that information isn’t available yet!

www.fizzhq.com

So, what's going on with IR35?

From April, as many contractors with limited companies will know, there's a significant change coming to IR35.  Those are the rules that say that if your limited company's income is really derived from you doing an "employee-style" role, you're not supposed to take advantage of the tax efficiencies a company offers and instead must pay more or less full employment taxes.  At present, unless you're working for a customer in the public sector, it's your initial call as to whether IR35 applies.  Given the bigger tax and National Insurance burden it generally imposes, and the grey area between modern employment and self-employment which means that employment status for many people is genuinely unclear, few contractors choose to declare under IR35.

 

From 6 April, if your customer is a medium or large private sector company, it's going to be their call, not yours.  Many contractors are going to find their customer deducting full employment taxes (including two lots of NI, both employer's and employee's) before receiving what's left.  And many others have already been told by their customer that they need to become a member of PAYE staff, or use an umbrella company (which amounts to more or less the same thing in tax and NI terms).

 

There's a process for disputing your customer's assessment, and maybe it'll work sometimes.  But fundamentally the idea is to shift the risk of non-compliance from contractors to customers, to encourage the customers to play it safe.  And at the moment it's clearly working to at least some degree - HSBC and Vodafone, for example, hitherto massive users of contractors with limited companies, have said they won't use them any more - it's PAYE or an umbrella company (i.e. also PAYE) if you want to work for them.

 

So, what might this mean to you in financial terms?

 

To do a very basic comparison:

• If someone invoices £80,000 through their company in a year (imagining zero expenses to keep it simple), then if they extract as much money as they can, as tax-efficiently as they can, they'll end up with about £58,000 in their bank account after tax.
• If their customer decides they'll only pay them via PAYE, and their budget is £80,000, then the person will be given a gross salary of about £71,000 (as the employer is going to have to pay Employer's National Insurance on top of it of about £9,000, making their total outlay £80,000).  On a gross salary of that amount, take-home pay after tax and Employee's National Insurance would be about £50,000.  So the second person is £8,000 worse off than the first one.

It's much more nuanced and complex than that.  The limited company owner, for example, might well delay or reduce tax further by *not* taking as much money as they could, leaving some in the company for the future, making a limited company even more beneficial.  They might be able to avoid repaying Child Benefit that way too.  And they might be able to split their income with a spouse, saving much more.  On the other hand, the second person would be getting paid holiday and pension, and might feel more secure.  There are lots of other aspects too.  But you can see that at the very least it'll result in a substantial reduction in take-home income.

 

Some people are saying that contractors should simply demand an increased day rate so that their take-home remains unaffected, but that's obviously likely to be wishful thinking for many people, though in the medium term perhaps supply and demand means that customers/employers will have to pay more.  But right now, if a contractor could command a higher fee, then they should be doing that anyway.  Changing tax regimes are just a fact of life that we need to be prepared for, and your utility and value to a customer is unchanged.

 

At present, the important thing is to be informed.  You'd be sensible not to agree a long-term contract running beyond April 2020 without certainty as to how you'll be paid.

 

The government are doing a last-minute review of the rules, and we've got a Budget coming up in March, so some people are holding out hope of the changes being postponed.  A year ago we'd have thought that was a futile hope, but since the ludicrous last minute postponement of new VAT rules in the building industry, anything's possible.  But if it doesn't come this year, it'll come soon (and it will probably come this year).

 

www.fizzhq.com

The Fizz 2016 Budget summary

We don't usually put our monthly email on the blog, since it's a client care thing to us rather than a marketing thing.  But from time to time we like to give a flavour of it to people we don't work with, so here's the summary of the Budget that we sent out to clients and contacts yesterday.

It was Budget day yesterday.

In 2010 the government set up the Office of Tax Simplification.  It must be the most ineffectual governmental agency of all time, since yet again in this Budget tax got more complicated still.  As we wrote in a blog the other day, we’re in a bizarre period where the government is obsessed with making it easier for businesses to submit tax returns, but virtually impossible for them to work out what should go on them.  Anyway, here are the aspects of yesterday’s Budget that we think will be of most interest/use to you.

The biggest news might be the new sugar tax - but we don't think it's massively relevant to our clients' businesses!

A good budget for small businesses?

That seemed to be the general verdict afterwards.  It’s clever stuff by old George, because he got the bad stuff for small businesses (like tax on dividends) done in the Autumn Statement a few months ago, and that’s forgotten about by the time the proper Budget comes around.  Overall there was more good than bad, but a few high-profile bits weren’t as good as they sounded on the face of it.

Lifetime ISAs

This was a classic headline-grabbing announcement that when you think about it, isn’t all that amazing – the ideal thing for a Budget, basically.

The idea sounds innovative – an ISA that can only be taken out by someone under 40 (but continued once they’re over 40), that the government will top up by a pound for every four pounds you contribute (you can put in up to £4,000 in a year, they’ll add up to £1,000), as long as the money is used for a first-time house or flat purchase, or saved until you retire.  Pretty good, right?

But, if you think about it, there’s already a system whereby the government will top up your investment by (at least) a pound for every four pounds you contribute, as long as you save the money until retirement.  It’s called a personal pension. So the innovation here is purely that you can get at a bit of your retirement provision early, as long as you use it for your first property purchase.  Nice, but not revolutionary.  Plus, you can actually get retirement funds out of a traditional pension at a younger age, and often get a higher rate of government contribution.  So this Lifetime ISA not necessarily as brilliant as they'd like you to think.

Pensions

Stayed the same, after all the fuss in the papers over the last few weeks.

Tax Bands

Nothing of interest to report.  Going up a bit, as you’d expect.
 
Contracting to the public sector

This is very relevant to a number of you.  The public sector uses a lot of freelancers/contractors invoicing via their own limited companies.  The Chancellor announced widely-anticipated moves to ensure that those people don’t save tax or NICs by doing so.  From 2017 (not this year, next year), the public sector body will be responsible for the calculation and payment of the freelancer’s tax and NIC on the contract, apparently.

It’s utterly absurd really, because if the government are so concerned about government workers paying the same tax and NIC as they would do if employed via PAYE, then THEY COULD JUST EMPLOY THEM VIA PAYE.  It’s hardly rocket science.  There’s no need to layer on new tax laws, just change your own procurement rules – you’re at fault here, not the freelancers.  Anyway, it’s happening.

Capital Gains Tax

A bit of a rabbit out of the hat - but it's not remotely the tax cut it appears.  Capital Gains Tax is currently 28% for higher-rate taxpayers, and it’s going down to 20% from April.  For basic-rate taxpayers it’s going down from 18% to 10%.

The thing is, at present, most people selling a business only pay 10% anyway, because they can claim something called Entrepreneur’s Relief.  So no change for them.  And for another large chunk of CGT-payers - those selling rental properties or second homes - it's staying at 18%/28%.  So it might just be a rather small proportion of those paying CGT who will save anything here.  Clever work, George.

Insurance Premium Tax

Another clever thing.  IPT is going up by 0.5%.  So your insurance will get a little bit more expensive, but you'll blame the insurance company.  It's a great tax to increase if you're a Chancellor.

New £1,000 tax allowances

There was not much detail on a couple of new tax-free allowances, of £1,000 each, below which you don’t need to tell HMRC about the income.  If we describe them as the “side business/eBay trading allowance” and the “Airbnb allowance” then that probably sums them up.  Since one suspects that not that many people were telling HMRC about income at that level anyway, this is more admin than anything else.

Corporation tax going down (eventually)

A further reduction in corporation tax in a few years' time – to 17% - was announced.  This was just continuing a general trajectory of decreasing rates starting in 2017, so it’s probably what we’d have guessed would be happening anyway.

There was bad news for trainee accountants still to do their tax exams, as a tranche of measures was announced designed to restrict the way very big companies can save tax on losses or on interest payments to overseas associates.  But they’re for companies far larger than those reading this email, happily.

Abolition of Class 2 National Insurance for the self-employed – don’t get too excited
 
Self-employed people pay two types of NIC, one very small (Class 2), one generally much bigger (Class 4).  The very small type is going, which was widely known already.  Don’t be surprised when the big one goes up a bit to compensate!

Small Business Rates Relief

At present, only businesses with premises with a rateable value (basically a theoretical annual rent that appears on your Business Rates bill) of less than £6,000 qualify for a discount on their Business Rates.  This is going up, and premises with a rateable value of up to £15,000 will qualify (to get a picture of what kind of premises that covers, imagine somewhere just marginally smaller than our office.  Gah!).

Stamp Duty on Commercial Property

Just as Stamp Duty on residential property changed from a "slab" system to a "stepped" system a year or two ago (which was good and sensible), now Commercial Property Stamp Duty is changing similarly.  As with the first change, Stamp Duty on 90% of transactions will stay the same or go down, with just the most expensive 10% going up. There are transitional rules if you're in the middle of a purchase.

If anything else came up in the Budget that you weren't clear on or think could be of use to you, do call or email - we'll be pleased to talk about it.  Similarly, if you'd like to talk about any of the topics above, let us know - though bear in mind that the nature of these things is that often the detail won't yet be finalised/published/understood.

www.fizzhq.com

Should you be declaring dividends in advance of the Pre-Budget Report?

Next year, tax on dividends goes up significantly for most people who trade via a limited company.  That means that many people in that situation will be looking at increasing their dividends in the current year, bringing some forward to take advantage of this year's tax rates, rather than next year's.

It's the Chancellor's Pre-Budget Report in a couple of weeks, and there have been some suggestions that he could implement some rules somehow discouraging bringing dividends forward into the current tax year, or making it pointless.  Fairly often such "anti-forestalling" rules are brought in when big changes are made to the rules, making some sort of tax planning or dodge redundant with immediate effect.  So, should you make the decision to bring forward dividends now, rather than waiting until later in the tax year, in case that happens?

We think it's actually really, really unlikely such rules will be brought in.  The government will actually be delighted for people to bring dividends forward and pay tax early - it's great for cashflow.  When the top rate of tax was increased from 40% to 50%, it resulted in a spike of income tax receipts as people were paid early, so as to take advantage of a tax rate that had looked harsh but suddenly looked generous.  There was no anti-forestalling, because the goverment were keen for people to get money out of their businesses and pay 40%, rather than leaving money in their businesses and sit it out. That's going to be the case here, and higher dividends being paid and taxed in 2015-16 will be something the government is keen on.

By all means, if you know you're going to want to up your dividends this year, and your company has the reserves to do so, go ahead and declare the dividend - it can't do any harm.  But we don't really think there's such a risk that the Chancellor will try to deter dividends fom being declared and tax paid on them for the remainder of this tax year.

www.fizzhq.com

One reason the dividend tax changes weren't quickly picked up on

Although the implications of next year's increased tax on dividends are now becoming widely understood (and we've been pointing them out since Budget day!), it took a while for lots of limited company owners to realise what happened.

Partly, that's because the media are obsessed with categorising the Budget news into different sections.  So, the decrease in corporation tax went into the Business section.  Great, thought company owners!  Meanwhile, the increase in dividend tax went into the Personal section, which many business owners aren't going to inspect as quickly or as closely.

If you're going to use that categorisation, those are technically the correct categories.  But it's nonsense to split the two things.  The taxation of profits in companies and then the taxation of what remains in the hands of company owners are inextricably linked.  To understand the big picture you need to look at them together.  The universal media categorisation can be really unhelpful.

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The Fizz Summer Budget email newsletter

We don't usually put our monthly email on the blog, since it's a client care thing to us rather than a marketing thing.  But from time to time we like to give a flavour of it to people we don't work with, so here's this month's email, our summary of the Summer Budget.

More thoughts on dividend tax in our earlier article here.

It was the second Budget day of the year yesterday!  And it was a big one for small business owners - particularly those operating via limited companies, or thinking of doing so.

New tax on dividends

This is the thing that's going to be of most significance overall to small business.  As a basic summary at this stage, as of 2016, for business owners planning on getting most or all of their profits into their own hands each year, there will no longer be any material tax/National Insurance incentive to operate via a limited company, as opposed to operating as a sole trader, partnership or LLP (see later).  We could go through detailed numbers, but that's the key thing to understand.  It's pretty much the same at all profit levels.

There do remain some reasons why limited companies will still be appropriate for many businesses, though!

• Many business owners *don't* want to draw out all of the profits that the business makes - limited companies remain a great way of sheltering profits that you don't need right now from higher-rate tax.
• They remain a very useful tool for keeping income below £50k so as to retain Child Benefit.
• It's easy to forget that the most fundamental benefit of a limited company is the "limited" - provided you're not naughty or reckless, you're less at risk personally if things go wrong with the business than you would be as a sole trader or partner.
• Very often, a customer will insist on your invoicing them via a limited company, so you don't have a choice anyway.
• Limited companies will also remain the most appropriate way for most businesses with multiple owners / investors to be set up.
• We look after lots of businesses that qualify for Research and Development Tax Credits - for those claims, a company is still essential (even an LLP can't claim).

However, it's definitely now the case that there's significantly less of an incentive for a typical one-person freelancer to work via a limited company.

One thing we think we'll see more of is LLPs - Limited Liability Partnerships.  They effectively offer the personal protection of a limited company, but the tax regime of a sole trader or partnership, with more flexible profit splits than limited companies too.  Up until now, they've been somewhat niche, because most people preferred the tax regime of limited companies and the attractions of flexible profit splits weren't enough to tempt them away.  Now that there's not much to choose between the tax regimes, the greater flexibility of an LLP is bound to tempt people towards them.  We imagine we'll be setting up quite a lot of them in future!  They're no good for sheltering "unneeded" profits from higher-rate tax though.

Of course, we'll be talking to all our affected clients about this individually over the year, and we'll be making very clear recommendations to you when the time comes.  It's quite probably going to be the case that most limited company owners remain in their current format, but it'll mean changes for some.  The biggest effect is likely to be deterring small businesses from shifting to a limited company in future.

People will come up with ideas for alternative ways of operating via a limited company to make the position better (we've had a couple already) but overall the tax and NI burden of a business owner is going to become much less of a factor in choosing their business structure.

We're not saying all this is a bad thing, by the way - there's a very good argument that company owner/directors have had things unfairly tilted in their direction until now.  In any case, it's the new reality!

Employment Allowance

At present, employers get let off the first £2,000 of Employer's National Insurance in a tax year.  That's going up to £3,000 next year.

However, it's being withdrawn from "director-only" businesses - allowing such businesses to claim the allowance had created a situation in which we'd been able to save about £200 per year per director by exploiting the interaction between the allowance, National Insurance and corporation tax.  We won't be able to do that for you next year!

For many employers of course, the extra £1,000 saving will be more than wiped out by...

Increases in National Minimum Wage

George got lots of headlines by calling it a new National Living Wage, but of course it's really just a change in the NMW.  It's a big one, though.  Within a few years, the NMW for over 25s will be £9 an hour.  Since it's presently £6.50 an hour, that's a 38% increase.  Anyone employing lots of people at that level but only making modest profits is going to have some serious issues with their business model.  Will it incentivise employers to sack people on the eve of their 25th birthday?  We'll see.

As an aside, it'll also of course mean an equivalent rise in the pension contributions employers will have to make on behalf of their employees once they've got an Auto Enrolment pension scheme in place.  There was nothing of any relevance to Auto Enrolment in the budget, by the way - it remains the case that small employers are going to need to have schemes in place in 2016 or (more likely) 2017.  Do talk to us about that if you've got worries about it.

Annual Investment Allowance

This was non-news really.  The AIA is the cap on the tax relief you can get for buying new fixed assets (computers, machinery, vans, tools etc).  It's bounced around an annual limit of £250k to £500k of purchases for the last few years.  It was due to come down to £25k.  That was never going to happen.  Instead, it's going to be £200k for a year - a level which is going to be completely fine for 99.5% of businesses, needless to say!

Corporation Tax

Big headlines for corporation tax coming down to 19% then 18%.  The reduction to 18% is in 2020 though!  Amazing the headlines you can get for something that won't happen for five years.  For limited company owners, it's a trivial reduction compared to the new dividend tax.

Insurance Premium Tax

This tax (which is added on to your insurance premiums, so you might pay it without even noticing most of the time) is going up from 6% to 9.5%, so a pretty hefty increase if you've large insurance costs.

Tax relief for landlords

At present, a wealthy Buy To Let landlord might save tax at 45% on the mortgage interest they pay for the property.  The maximum tax saving is going to be restricted to 20% (phased in from 2017) - effectively a landlord who is a basic rate taxpayer will be no worse off, but higher earners will be.

In addition, the ability to claim a 10% wear and tear allowance when you're letting out a furnished property is going too.  Though HMRC have previously redefined "furnished" to such a strict level that few landlords could legitimately claim to be letting out a furnished property in any case.

Inheritance Tax

The government's obsessed with the idea of passing on the family home tax-free for some reason.  By 2020 there will be an extra bit of IHT allowance available when a home is included in the estate (or even if it's been sold when the owner, say, downsized but there are equivalent other assets in the estate), effectively increasing the amount a couple can pass on tax-free to £1m.  IHT for estates over £2m will go up to cover the cost.

Decreased pension allowance for high earners

At present (subject to some other rules) anyone can contribute up to £40,000 to a personal pension each year.  That's going to be reduced for those earning over £150,000.  For every £2 your income is over that limit, you lose £1 of the allowance.  So, by the time your earnings hit £210,000, you'll have lost £30,000 of the entitlement, and can only contribute £10,000 in a year.  It stops there - you're still able to contribute up to £10k and get tax relief, no matter how high your income.

If anything else came up in the Budget that you weren't clear on or think could be of use to you, do call or email - we'll be pleased to talk about it.  Similarly, if you'd like to talk about any of the topics above, let us know (although it's a bit early to delve into the detail of dividend tax - let's wait a little while on that until the dust has settled and the small print's clear!).

www.fizzhq.com

Tax on dividends from 2016 - kind of a big deal

Traditionally, the majority of company owners have taken their income as a combination of a) PAYE salary and b) dividends, with the balance skewed towards the latter.  That's because, unlike salary, or the income of sole traders and partners, there's no National Insurance on dividends.

The saving is sufficient that, for many business owners, trading via a limited company is worth it on the grounds purely of National Insurance planning, let alone the other tax and commercial benefits of a company.  Rather than paying the 9% National Insurance that a sole trader pays, you paid none, quite legitimately, and still accrued the right to State Pension.

Ever since Jane and Greg began training (i.e. a long time ago), every Budget has been preceded by people claiming that the Chancellor of the day was going to apply National Insurance to dividends, or apply a higher rate of tax to them, to address the perceived unfairness of this.  The issue has been exacerbated over time by changes in the way the UK workforce operates - many people who traditionally would have been PAYE employees switched to contracting via a limited company (either on their own initiative, or encouraged by an "employer" wanting to minimise its liabilities under NI and employment law), an arrangement sometimes referred to as disguised employment.

But, year after year, nothing happened.  In 2000, some rules commonly known as IR35 were introduced in order to try and specifically attack the arrangements of those people who would have traditionally been on PAYE but were now trading via companies.  It was poorly conceived and written law, that HMRC didn't remotely have the capacity to apply on a meaningful scale, and it's been a colossal failure.

This year, something's happened.  Rather than attacking disguised employment, George Osborne's decided to just apply new rules to company owners (actually, anyone receiving dividends, but people trading via a company will be the most affected).  As of 2016, a taxpayer can receive £5,000 of dividends without paying any tax on them, but after that there's tax to pay.  A basic rate taxpayer will pay 7.5%, then the rate will go up to 32.5% for people in the 40% bracket, and 38.1% for people in the very top tax bracket.

So, the person who formed a company to avoid the 9% NI of a sole trader still avoids it - but, if they've got £30,000 of dividend income in a year, they'll pay tax at 7.5% on £25k of the dividends, which is £1,875.  That's less than the NI (by about a thousand pounds), but the saving is quite likely to no longer be quite enough to attract a lot of people towards forming a company.

For dividends above that level, a company now looks less attractive than being a sole trader!  A sole trader in the higher rate bracket effectively pays 42% (40% tax plus 2% NI).  A company owner will pay 46%!  Their company will pay corporation tax of £200 on profits of £1,000, and if the owner takes the remaining £800 as a dividend when already in the higher rate bracket, they'll pay tax of 32.5% of the remaining £800, which is £260.  £460 tax in total on £1,000 of profits.  It'll be a bit less harsh as corporation tax goes down to 19% then 18%, but not much less.

There are other advantages to companies still!  The fundamental one is limited liability, of course, but they remain a great way of sheltering income that you don't need from higher rate tax, for example.  But it seems pretty likely that a large proportion of purely tax-motivated incorporations are likely to be much less desirable than they once were - and there could be plenty of people coming out of limited companies and reverting to sole trader status.

By the way, none of this is to say that the changes are unfair.  There's a strong argument that company owner/directors have got away with an unfair advantage for a long time, and without question George Osborne has done more to address it in one day than has been done in the previous 20 years, albeit by using a blunderbuss rather than a scalpel.  It's a big deal, though, and it'll cause a lot of upheaval for UK limited companies (and their accountants!).

www.fizzhq.com

Bad news from the Autumn Statement for profitable sole traders and partnerships

There was some pretty bad news for many profitable sole traders and partnerships from the Chancellor in last week's Autumn Statement.

For many years, there's been an opportunity to (quite legitimately) save some tax when transferring an unincorporated business (i.e. a sole trader or partnership business) into a limited company.  If one could reasonably argue that there was some intrinsic value to the business above and beyond just the skills of the owner - effectively, that there's a value there that might plausibly make it a saleable business to a third party - then you could quantify that value and sell it to the company.  That created two tax savings.  First, a one-off capital gain for the owner - generally taxable at a lower rate than income.  Second, an ongoing saving for the company, which could claim tax relief on the cost of the goodwill, over a period of years.  It was a great opportunity for a business of genuine value, and was a mainstream and commonly used tax planning strategy, often generating some really big tax savings.

As of last week, it's gone.  You can still make the transfer of course, and can still place a value on the goodwill.  However, one tax advantage has gone and the other is severely diminished.  The company can no longer save tax on the goodwill.  And although there still might be a modest tax saving for the individual on a fairly small goodwill valuation and capital gain, the bulk of the personal saving was generated by making a claim for something called Entrepreneurs' Relief - and you can no longer make that claim in those circumstances.

So pretty bad news for a lot of businesses that were planning such a move, which nobody saw coming at all.  If you were planning on making a shift into a limited company, it's still very likely to be worth it, since the ongoing tax and National Insurance benefits are unchanged.  But that one-off boost is pretty much a thing of the past.

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Our thoughts on the 2013 Budget

You may not have noticed, but it was budget day yesterday. Here's our roundup of the things that we think could be of most interest and practical use to owners of small businesses.  As usual, it's far from exhaustive - if you want a complete rundown of everything there are plenty of places that will provide it!

National Insurance savings for employers - from 2014

So, this is probably the biggest thing for many small businesses.  From 6 April 2014, employers will get let off the first £2,000 of Employer's National Insurance that they'd normally pay.  So, if you're in that position that's money in your pocket.  Of course, your profits will have gone up as a result, so you'll have a bit more tax to pay - a small company that benefits from the full discount will see its profits go up by £2,000, and therefore its corporation tax bill go up by £400.  So the real benefit to the company is £1,600.  But it's still worth having!

If you're a "director-only" company and have no National Insurance cost at present, it seems unlikely this change will benefit you that much, as it eliminates Employer's National Insurance but not Employee's National Insurance, meaning that it's unlikely to be massively beneficial to pay a significantly greater PAYE salary to take advantage of the concession.

Corporation Tax

As ever, all the headlines about corporation tax going down only apply to big companies (or, at least, companies making big profits).  For a company with profits of £300,000 a year or less, corporation tax was at 20% and it remains at 20%.

Income Tax

As was widely predicted, the personal allowance (i.e. the amount you can earn free of tax) will go up to £10,000 - from 6 April 2014, not now.  That's only actually about a 6% increase on the year to come, so not a massive difference, but will of course be welcome to many - it'll be worth £112 a year to basic-rate taxpayers.

Childcare Tax Break

From next year, parents of children under 5 will effectively be able to get £1,200 of childcare paid for by the state, per child, as along as they're not getting a childcare element to their tax credit payments.  This applies as long as a) both parents work and b) household income is less than £300,000.  Given that the government has in the last few months begun to withdraw child benefit from households where someone earns more than £50,000, you might question the logic of introducing a new flat-rate child payment that you can still get if you and your partner each earn £149,999.  So would we.

SEIS extended

The Seed Enterprise Investment Scheme is something we've talked about before, offering income tax savings on investments in new businesses.  I won't explain it again, you can read about it here:

http://tinyurl.com/cvr6k7x

Anyway, for the current tax year within the scheme there was also an opportunity to reduce or eliminate existing Capital Gains Tax bills by reinvesting in a company via SEIS.  That opportunity was supposed to cease on 5 April - but it's being extended for another year.

Tax reliefs for creative industries

The government confirmed the introduction of a tax credit for companies "involved in the production and development of culturally British animation, high-end television drama and documentaries, and video games".  However, at the moment it appears that the beneficiaries will be the actual companies producing the animation/film/game, rather than any subcontractors, and that animation for advertising purposes won't qualify.

Help to Buy

This will be of no particular use to 99% of people, but very valuable to a few.  Essentially, the government will apparently lend you most of the deposit for a new-build house, or guarantee most of your mortgage, on the condition you repay them at a later date.  Of course there are plenty of questions one could ask about this - what happens if the house goes down in value and you want or need to move, for example.  But there's no detail on the scheme yet anyway - with the previous FirstBuy scheme it was many months before the loans actually became available, so don't start looking at places this minute!

www.fizzhq.com