Abbey

Chartered Tax Advisers
Old Bishops' College
Churchgate
Cheshunt
Hertfordshire
EN8 9XP

T: 01992 642024

E: abbey@abbeyaccountants.com

Smiling businessmen and women

  TAX E-NEWS - Monthly Update - Summer Budget - July 2015


In this month's Newsletter we focus on a few of the main changes announced in the summer 2015 Budget.

I have to say that part of what was announced came completely out of the blue. On certain major changes which fundamentally alter the way small businesses fall to be taxed, there has been no consultation and absolutely no warning. The Tories are supposed to be the party which is pro business. It may be pro big business but it is certainly not pro small businesses.

Peter McDaid CTA ATT TEP
Director

TAXATION OF DIVIDENDS (the new stealth tax)

From 6 April 2016 there will no longer be the notional tax credit of 10% associated with dividends received.
This 10% tax credit was originally given because corporation tax had already been paid on the profits that the dividends were paid out of. Corporation tax is still obviously being paid on company profits but individuals are no longer receiving any credit for it.

In addition also from the 6 April 2016 income tax will be payable at the following rates on the net dividends received by an individual after the deduction of a £5,000 tax free dividend allowance:

Basic rate taxpayers - 7 ½% (was 0% )
Higher rate taxpayers - 32 ½% (was 25% )
Additional rate taxpayers - 38.1% (was 30.56% )

Basically a 7.5% tax increase will be imposed across the board on all dividend income apart from the first £5000. This is going to affect a very large number of individuals who hold stock/share portfolios, many who will be retired and dependent on their dividend income to sustain their living standards.

IMPACT OF CHANGES TO DIVIDEND TAXATION ON SMALL COMPANIES

A common strategy that we often advise to small companies’ director/shareholders is that they extract profits from their company mostly by way of dividends instead of paying themselves a large salary.

The logic behind this is that there are no national insurance contributions (employer 13.8% and employee 12%) charged on dividend payments and where the dividend income falls within the basic rate band (up to £42,385 for 2015/16) there is currently no personal income tax charge on dividends.

For example say there was a small family company where there are only two directors/shareholders who are husband and wife. The company would normally pay corporation tax at 20% on its profits. Dependent on the level of profits arising in the company the directors/shareholders would normally pay themselves each for the year the minimum of a small salary of say 8K and a balance of 30K in dividends. The remaining profits would be retained in the company to be extracted at a future date. For the 2015/2016 tax year there would be no personal tax liability arising on the husband/wife.

Under the new rules post the 06 April 2016 there will be an income tax charge payable on the dividend income.
In this example both the husband and wife will have to pay 7.5% on £25,000 (£30,000-£5000) equal to an additional tax liability of £1.875 each. This is subject to unutilised personal allowances which may be available to slightly reduce this liability.

If their personal financial requirements/commitments require larger dividends being withdrawn the resultant additional tax charge is going to be correspondingly larger.

Is this dividend tax a back door equivalent of introducing national insurance on private company dividends? Being cynical it is going to be relatively easy for the Chancellor to ratchet up the dividend rate each year.

Pre 05 April 2016 planning needs to be carried out in this connection and the method of extraction of funds from the company will have to be revisited. It may well be that the tax logic of the incorporation a business is weakened but there are of course other factors which warrant the use of a company.

Some business owners may consider this the last straw and either cease to trade, retire or sell their business before these rules come into force.
TRAVEL

The Government has announced that it will carry out a consultation on home to work travel. Many small businesses have their place of business at home and once they leave their home subject to certain rules they are travelling on business. I suspect that the Government’s aim here is to severely curtail what can be claimed in these circumstances.

EMPLOYER NATIONAL INSURANCE ALLOWANCE

From 06 April 2016 this will be increased from £2000 to £3000. This is good news but the sting in the tail is that it will no longer be available for one person companies.

NEW “NATIONAL LIVING WAGE”

The National Minimum Wage is currently £6.50 per hour rising to £6.70 an hour in October 2015. The government will introduce a National Living Wage for all working people over 25 and from 06 April 2016 this will be £7.20 per hour. The Government has also set a target of raising this to £9 an hour by 2020.

The large supermarkets have been in the press complaining about this but not a lot has been said about small businesses. A very large number of small businesses that we deal with especially in the retail and the hospitality sector will struggle badly to cope with this. These businesses’ profits are already under intense pressure and some will undoubtedly go under as a result of this. Each business must assess the impact of this change on the profitability of their business and plan accordingly.

BUY TO LET LANDLORDS – INTEREST RELIEF TO BE RESTRICTED TO BASIC RATE

The Chancellor announced that the amount of income tax relief landlords can get on residential property finance costs (such as mortgage interest) will be restricted to the basic rate of tax.

To give landlords time to adjust, the change will be phased in gradually over 4 years:

2017/18 - the deduction will be restricted to 75% of finance costs, with 25% being available as a basic rate tax reduction.

2018/19 - 50% finance costs deduction and 50% given as a basic rate tax reduction

2019/20 - 25% finance costs deduction and 75% given as a basic rate tax reduction

From 2020/21 - all financing costs incurred by a landlord will be given as a basic rate tax reduction.

BUY TO LET LANDLORDS (FURNISHED)

From 06 April 2016 the annual 10% Wear and Tear allowance to cover the costs of furnishing a let property is being replaced by a new relief which allows landlords to deduct the actual costs of replacing furnishings. Landlords will now need to retain evidence/documentation to support the costs claimed.


TAX DIARY OF MAIN EVENTS FOR July/August/September 2015

Date What's Due
31 July Second 50% payment on account of self assessment income tax for 2014/2015
1 August Corporation tax for year to 31/10/14
19 August PAYE & NIC deductions, and CIS return and tax for month to 05/08/15 (due 22 June if you pay electronically)
01 September Corporation tax for year to 30/11/14
19 September PAYE & NIC deductions, and CIS return and tax for month to 05/09/15 (due 22 July if you pay electronically)