Small business owners may seem to have been targetted by some of the key measures contained in George Osbourne’s Summer Budget 2015. What do these changes mean for sole traders and partnerships who are wondering whether to incorporate their business?
Dividends. One surprising measure was the overhaul of tax on dividends. From April 2016 the notional credit system (which means basic rate taxpayers pay no tax on dividends) will be scrapped, and instead a new dividend allowance of £5,000 will be introduced. Anything received above that will be taxed at 7.5%, 32.5% and 38.2% for the basic, higher and additional rates respectively.
After some initial confusion as to how this allowance will work in practice, HMRC has now confirmed that all taxpayers, regardless of their marginal rate, will benefit from the first £5,000 of dividend income tax free but, it form part of the basic rate that all taxpayers receive. But this is off-set slightly by not having to “gross-up” dividends to calculate the taxable dividend.
Owner-managed companies will be affected by this. Those following the traditional advice of taking a notional salary and topping up to the basic rate band with a dividend will see their tax bill increase.
Employment allowance. In a second measure aimed at very small business, it was also announced that the £2,000 allowance which reduces the NI liability for companies will no longer be available where the only employees are the directors (one-man bands, husband and wife set ups etc.). This will also be effective from April 2016.
Goodwill amortisation. Finally, the announcement that there will be no allowable deduction for the cost of purchasing the goodwill element of another business or trade from 8 July 2015 will affect businesses that buy the trade of small competitors or retiring persons.
These measures are on top of changes in previous budgets to restrict Capital Gains Tax Entrepreneur’s Relief and other goodwill changes that removed some of the benefits of incorporating for small business owners.
Clearly there are many commercial non-tax reasons for incorporating a business, but the primary tax motive common in many incorporations over the past few years may well no longer be there.
If you are a small business owner wishing to consider how to reduce your tax liability and think you might be affected by the changes please contact us
Scott Burkinshaw
Scott is Tax Partner at Shorts, specialising in providing strategic corporate and personal tax advice.
View my articlesTags: Business Taxes
