Wednesday 9th July saw the first all Conservative Budget since 1996. The press coverage in the wake of this budget announcement was positive and heralded more money in the pockets of low earners, however this has to come from somewhere.
Having been through the finer detail and analysed the impact on small and medium business owners, we have identified three main areas that are affected most. Business owners receiving dividends, buy-to-let property owners .
We will go through the main areas in turn and outline how businesses are affected as follows:
Presently company directors and shareholders often receive a small salary and dividend payment form the company. Over the course of a year, after the company has paid tax on it’s profits, director-shareholders typically receive £8,060 salary and £30,000 net dividend without paying any personal tax, assuming no other income. (The dividend is net of a 10% tax credit).
Above this level, higher rate tax payers earning up to £150,000 pay an effective rate of tax of 25% on their net dividends. (This is calculated at 32.5% on gross dividends less a dividend tax credit of 10%).
Under the plans coming in, the dividend tax credit disappears and shareholders will have to pay tax at 7.5% on net dividends up to the higher rate threshold and then at 32.5%. The tax credit has been eliminated. There will be a £5,000 allowance, where no tax is paid on the first £5,000 of dividends received.
It is obviously early days yet and the budget proposals have not yet become written in law, so we await updated guidance on the calculations. We have identified on our understanding of how we think this will work, that a typical director-shareholder receiving the salary of £8,060 and net dividends of £30,000, could have an annual tax bill in the region of £1,685. Currently after paying corporation tax they are not paying anything.
There is a proportional increase for higher earners. We calculated that a company director-shareholder receiving dividends of £80,000 could be paying an additional £3,600 in tax per annum.
What this tax change does, is reduce the tax advantage of unincorporated businesses such as sole traders and partnerships becoming limited to save tax.
We will be contacting all clients affected by this with options shortly.
The budget included an announcement that higher rate tax paying property owners would have the mortgage interest relief that they claim against income, restricted. This will be phased in from 2017 and we do not have much more detail on this.
What currently happens is buy to let property owners receive rentals from client and in calculating their rental profit, can deduct the mortgage interest and other costs associated with letting properties.
Under the new proposals we might see scenarios where a higher rate tax paying property owner has a buy to let property with a monthly rental income of say, £500 and a monthly interest only mortgage payment of £500. They will therefore not be making any ‘cash profit’ on this property, however for tax purposes, they are making a profit of £500 per month (assuming no other expenses).
Obviously this is early days and we need to wait to find out the finer points of what this actually means in real terms.
We believe that we have identified a solution to this problem that might help some clients, however we need to wait to see the legislation.
Another change coming in that will affect owners of furnished lettings, is the replacement of the 10% wear and tear allowance with a deduction for the items which this usually covers, i.e. moveable furniture, televisions, linen, fridges, freezers, curtains, carpets, crockery, cutlery and beds & other furniture.
The amount that a high earners (over £150K) can put into a pension and claim tax relief on has been reduced to a minimum of £10,000. The current annual allowance of £40,000 will be tapered down to the minimum for people in excess of this income level.
The nil rate band of IHT is frozen at £325,000 until April 2021.
The chancellor however announced a new exemption, starting at £100,000 and rising over the years to £175,000 for people who leave their main residence to direct descendants. For example if someone dies, leaving a home worth £450,000 to their children in 2017/18, they would have an exemption from IHT of £325,000 + £100,000 = £425,000. Therefore only £25,000 would be subject to IHT.
If someone does not use up all of their allowance, they can transfer it to their spouse or civil partner.
There is also flexibility in downsizing. Where people choose to downsize, the difference between what their old house was worth and what their new house is would potentially be covered by this exemption.
We have already identified to many clients that there is a new childcare scheme coming into force from 1 October 2015. The new scheme allows parents to buy childcare direct from the provider and to have it grossed up by the government. Every 80p they spend is grossed up to £1.
This replaces the current scheme offered by employers, where they pay up to £55 per week per employee for childcare, direct to the child care provider.
The new scheme offers greater savings for people with two or more children.
The old scheme can still be run for existing employees who are already in the scheme. Typically people who benefit from this scheme would be paying less than or up to £55 per week for childcare.
National Minimum Wage
The minimum wage is rising from 1 October 2015 to £6.70 for over 21 year olds, £5.30 for 18 – 20 year olds and £3.87 for under 18 year olds.
Apprentices under 19 years old or over that age on their first year apprenticeship will go up to £3.30 per hour.
There is also the National Minimum Wage coming in for over 25 year olds at £7.20.
HMRC are spending £1m on enforcement to ensure that employers are adhering to the wage rises.
The employment allowance, which is the exemption from the first £2,000 of employers national insurance will increase to £3,000 from April 2016.
Don’t forget that there is also no national insurance payable on under 21 year olds. This was brought in in the last Budget.
The Budget document referred to Government plans to review and monitor salary sacrifice schemes that reduce their tax receipts. This is very much ‘watch this space’ message. In the meantime, there is still scope for having salary sacrifice arrangements in place.
The rate of Corporation tax will be falling to 19% for accounting periods starting 1 April 2017. It then will fall to 18% from 1 April 2020.
The annual investment allowance will become £200,000, permanently from 1 January 2016. It is currently £250,000, so if you are investing in plant and equipment in excess of £200k in the next few months, speak to your tax adviser and time your purchases carefully!
The tax relief available on amortisation of goodwill, purchased from third parties will no longer be available for acquisitions and disposals after 8 July 2015.
These are the main points that we have picked up from the budget which affect our clients. There is a great deal in there that will affect clients and we will therefore be contacting people individually over the coming weeks to advise of what the changes will be and what we can do about them.