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!).