Summer Budget 2015: a mixed bag for small businesses

FreeAgent’s Chief Accountant, Emily Coltman FCA, takes a look at today’s Summer Budget and its implications for small businesses.

Double whammy for one-person limited companies

Many limited companies in the UK have only one director, who is also the only shareholder of that company, and does not employ anyone else. Today’s budget announced two measures which will increase the tax bill for these companies and their directors.

Employment Allowance changes

The Employment Allowance, which currently allows most employers to reduce their employer’s National Insurance bills by £2,000 a year, is to be withdrawn from companies where the director is the sole employee, as from April 2016.

For other employers, however, the Employment Allowance will increase to £3,000 from April 2016.

Amendments to dividend tax regime

At the moment, if you are a basic rate taxpayer, you pay no additional tax on dividend income, because dividends are currently treated as paid after a 10% tax credit has been applied. Many sole director/shareholders choose to have the company reward them with a mixture of salary and dividends in order to take advantage of this.

The dividend tax regime is changing from April 2016: the 10% tax credit will be replaced by a £5,000 dividend income allowance. Any dividend income over that level will be subject to income tax at the following rates:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers

This, particularly when coupled with the withdrawal of Employment Allowance for one-person limited companies, could result in significant increases to tax bills when the company and its director are considered together. The budget report specifically says that one aim of the changes to the dividend tax regime is to reduce so-called "Tax Motivated Incorporation" in order to “start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities”.

Annual Investment Allowance increase

The Annual Investment Allowance (AIA), which gives businesses 100% tax relief on the cost of most new equipment, has fluctuated considerably since its introduction, from £25,000 to £500,000. AIA is to be set permanently at £200,000 from 1st January 2016.

Corporation tax rate cuts

The overall rate of Corporation Tax is to be cut to 19% in 2017 and then to 18% in 2020.

Statutory exemption for trivial benefits in kind

If an employer provides trivial benefits for its employees, costing under £50 per employee per year, these won’t be subject to tax and National Insurance and won’t have to be reported on forms P11D.

Areas to be reviewed

In addition to these changes, the Chancellor also announced today that the following areas will be reviewed:

Tax treatment of travel and subsistence expenses

This has been mentioned in earlier budgets. We can expect a discussion paper on this subject “shortly”.

Closer alignment of income tax and National Insurance

The Office for Tax Simplification is to be commissioned to review this.

National Insurance for the self-employed

A consultation will take place in Autumn 2015 on the subject of abolishing Class 2 National Insurance and reforming Class 4 National Insurance.

Taxation of small companies

The Office for Tax Simplification is also commissioned to review the taxation of small companies. It will be interesting to see what other recommendations they have on top of the changes that were announced today.

“Improvement” of IR35

HMRC has been asked to “start a dialogue with business on how to improve the effectiveness of existing IR35 legislation”. It’s interesting that the government appears to be opting for improving the existing rules rather than starting again with a different set.

Digital reporting to replace the tax return

The government has promised that “a roadmap” will be published later this year, following discussions between HMRC, businesses and software providers, about how reporting and payment of taxes can be integrated with day-to-day business processes to allow digital reporting to replace the tax return.

For small businesses, this Budget is something of a mixed bag. The increases to the Employment Allowance and Annual Investment Allowance for some small businesses are positive, but one-person limited companies will be hit by the changes to the dividend tax regime and will also lose the Employment Allowance. To find out more about the announcements made in today’s Budget, you can read the full report here.

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