The Chancellor’s recent Budget statement had some significant tax implications beyond the media’s obsession with welfare cuts and the living wage. Details include:
The Budget has made some fundamental changes in the way Dividends from Companies are taxed. The way the tax works and implications of this are set out below:
Now & Until March 2016
At present, dividend income (of any sort) is effectively not taxed provided your total taxable income does not stray into the higher rate tax band. For 2015-16, this means that provided your total taxable income does not exceed £42,385, you will not be taxed on any dividend income. If your income exceeds £42,385 you pay tax of 22.5% of the gross amount above the threshold.
This means that in 2015/16 if you received a dividend of £27,000 Net (£30,000 Gross) and a salary of say £10,600, and had no other taxable income, your Total Taxable Income would be £40,600 and you would pay no tax at all.
From April 2016
The first £5,000 of Net Dividend Income is tax free – after that Dividend Income is taxed at 7.5% up to the Higher Rate Threshold. Dividends income received above the threshold will be taxed at 32.5%, or 38.1% if your Total Taxable Income exceeds £150,000.
Using the same figures as above, there is still no tax on the salary element (which for 2016/17 will be £11,000). The Net Dividend Income of £27,000 will attract a personal tax charge of £1,650 (£27,000 less £5,000 allowance at 7.5%).
The Government promised not to increase taxes through the “Tax lock”. The tax rise on dividends is actually achieved by reducing the actual rate of tax on dividends from 10% to 7.5%; and simultaneously removing the tax credit element which effectively cancelled out the tax charge for basic rate tax payers and reduced the higher rate charge by 10% – Truly a politician’s response.
Please note that the National Insurance thresholds for 2015/16 are unchanged, so the maximum tax and NI free salary is £8,060 pa.
The Employment Allowance of £2,000 given in 2014/15 as a deduction against Employers National Insurance has been repeated for 2015/16, and will rise to £3,000 for 2016/17. However one person Companies can no longer claim this allowance.
IR35 & Personal Service Companies
Along with the restriction on the National Insurance reclaim (see above) and the introduction of a dividend tax, there were the following comments in the Budget Statement:
“The Government recognises that many individuals choose to work through their own limited company. However, where people would have been employees if they were providing their services directly, anti-avoidance legislation (known as IR35) introduced in 2000 requires that they pay broadly the same tax and NIC as other employees. The Government has reiterated it is clear that the IR35 provisions are not effective enough. Non-compliance in this area is estimated to cost over £400m a year.
The Government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation. The Government is keen to find a solution that protects the Exchequer and improves fairness in the system”.
At present, no more is known, but if you have a Company that operates providing your services to one Client, be wary of what might be coming. Even so, at present this is talk, not action.
Corporation Tax & Capital Allowances
The corporation tax rate has been set at 20% for the period April 2015-March 2017. It will be cut to 19% for 3 years from April 2017 and to 18% from April 2020.
The current Annual Investment Allowance of £500,000 has been reduced to £200,000 from 1st January 2016 – this is said to be a permanent fix, rather than a short term rate – in the last 5 years it has varied between £25,000 and £500,000.
Goodwill amortisation for tax purposes has been abolished in full for assets purchased after 8th July 2015.
Companies with profits in excess of £20 million will have to pay their tax in 4 installments – one at the end of each quarter.
- 10% wear and tear allowance for landlords to be replaced in 2016/17 with relief for actual expenditure on furnishings.
- Annual allowance for pension contributions by those earnings over £150,000 to be reduced for 2016/17 – tapering down from £40,000 to £10,000.
- Mortgage/Loan interest tax relief for higher rate (40%) landlords will be restricted from April 2017, and limited to basic rate tax relief only from April 2020.
- Rent-a-room relief increased after 18 years to £7,500 from April 2016.
- From April 2016 all bank and building society interest will be paid Gross. Each basic rate tax payer will have a saving allowance of £1,000. A 40% taxpayer will have a savings allowance of £500.
- From April 2016, certain benefits-in-kind, costing up to £50 will be exempt from tax. Directors of close companies will have an annual limit of £300 pa.
- The existing Inheritance Tax Nil Rate band of £325,000 remains unchanged. There is a new separate value of a home band, starting at £100,000 in April 2017, rising over 4 years to £175,000. For a couple this means that there is a nil rate allowance of £1 Million (2 times £325,000 and 2 times £175,000). There is no home-related nil band if the house concerned has never been used as a residence or if the total estate is worth over £2 million.
A complete copy of the Chancellor’s Budget Statement can be found using this link.
If you would wish to discuss any of the above, please contact Mike Keatley, Mustak Dhanji or Lynn Dumbarton on 01280 818776.
Whilst all possible care is taken in the preparation of the above, no responsibility for loss occasioned by any person acting or refraining from acting as a result of the above can be accepted by this firm.
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