Here are some particular points we want to highlight to you from the post election budget. Further detail can be found in our budget summary.
Change to tax on dividends
In a surprise announcement, the Chancellor has said that from 6 April 2016, dividends will be taxed at a higher level than currently. This is potentially bad news for the directors /shareholders of a majority of owner managed companies who tend to favour income withdrawals via dividends, due to the tax credit available which means after their company has paid its tax on the profits, they have no further personal tax (or National Insurance) to pay, as long as such withdrawals are within the basic rate band of tax, (currently £42,385 pa gross income per person).
What will happen specifically is as follows –
- The tax credit will be removed
- A £5,000 tax-free allowance will be allowed against dividends
- The balance will be taxed at 7.5% up to the basic rate limit (0% currently)
- 32.5% after that for higher rate tax payers
- And 38.1% after that for additional rate payers (income in excess of £150,000.)
So you can see that anyone receiving dividends from their company in excess of £5,000 will pay personal tax from April 2016, whereas this is not the case now for basic rate tax payers.
However it may not all be bad news as the first £5,000 it seems will not be taxed and shareholders will pay on the dividends actually received, rather than on a grossed up amount, as now due to the tax credit.
HMRC have not at present released clarification on this subject and therefore we must await further information before we can give a clear comparison of the effect of these measures.
Once the position is clear we will publish further clarification and be discussing with clients what the effect will be on them and whether any changes to their income withdrawal strategy might be appropriate.
Reduction in Corporation Tax rates
As some justification for the increase in tax on dividends, it was announced that the rate of corporation tax will reduce from 20% to 19% from 1 April 2017, with a further reduction to 18% scheduled for 1 April 2020.
Aim to increase higher rate tax threshold to £50,000
Possibly this may also be taken as some comfort given the tax on dividends. The threshold has been very static for a number of years. The aim is to achieve this by 2020.
Annual Investment Allowance : Permanent increase
This is the relief you receive in the year of purchase of plant and machinery. It was due to go back down to £25,000. It will now be increased to £200,000 from January 2016 and this will be its new permanent level.
Restriction for companies to tax relief on goodwill
Another surprise and not a good one. Companies under appropriate circumstances can currently claim tax relief on the amortisation of purchased goodwill. This relief has been removed for acquisitions on or after 8 July 2015.
This may be bad news for businesses buying or selling now and in the future as the purchaser will not now enjoy tax relief in his acquiring company on the goodwill purchased, which was a clear financial incentive.
Worsening tax relief for buy to let landlords
Tax relief on mortgage interest and other finance will be restricted to the basic rate of tax and this measure will be gradually phased in between April 2017 and 2020. (Residential property only)
In addition from April 2016, the 10% wear and tear allowance will be removed, replaced by a new tax relief claimable on the actual costs of replacing furnishings.
Increase to rent-a-room relief
This is available to exempt income received from renting a room in your home. This will increase from £4,250 to £7,500 from April 2016. It applies also to guest houses and bed and breakfast as long as you live there as your home.
Inheritance Tax : Increase in nil band on family home
This is designed to exempt a family home and the value in the estate due to downsizing from a previous home, by up to £1 million, an increase from the current level achievable of £650,000. This will be phased in from April 2017 to 2020. Further details can be found in our full budget report.
Loss of pension relief allowance for high earners
For individuals with income over £150,000, the annual pension contribution limit, currently £40,000, will be reduced £1 for every £2 of income in excess of £150,000 (including pension contributions) down to the minimum limit of £10,000.
Increase in the employment allowance
Some good news! The employment allowance which reduces the Employers’ National Insurance businesses would otherwise pay by £2,000 pa currently will increase to £3,000 from April 2016. Companies whose sole employee is the director will not be able to claim it anymore though.