With the budget being delivered next week, I thought this would be appropriate for my first post...
In the run up to the election David Cameron described small businesses as the economy’s “magic ingredient”, he also pledged not to increase income tax in the first 5 years. So why since the election does it seem that small businesses have been the hardest hit with the changes in the budget? Yes, something needed to be done but it’s tough enough running and trying to grow a small business, surely they should be giving tax incentives to flourish and grow, rather than be stung from all angles.
Here is a summary of the key changes that will have an impact on my clients:
7.5% Tax on Dividends
Since before I started practicing in 2006 it has been more tax efficient to run a business through a Limited company, than as a sole trader or partnership. By paying a small salary and taking the remaining income as dividend, National Insurance payments were avoided.
From 5th April 2015, the first £5,000 of Dividends taken in a tax year are tax free, thereafter 7.5% tax is payable on the basic rate tax bracket, 32.5% on the higher level tax bracket, then 38.1% on dividends in the additional rate band.
For the majority of clients that draw where they can up to the 40% tax bracket an additional £2,246.10 of tax is payable. Narrowing the tax advantage of operating through a Limited Company.
National Living Wage
From 6th April 2016 the National Living Wage will be introduced for workers aged 25 and over. Taking pay from £6.70 an hour up to £7.20. This will rise to £9 per hour by 2020.
All employers fall under the Automatic Enrolment requirements, whilst small businesses have been given later staging dates than larger employers. Unless an employee opts out an employer will be required by 1st October 2018 to make an additional 3% employers pension contribution added to this the administrative headache of complying with Automatic Enrolment requirements.
Abolishment of the Tax Return
Tax returns are being replaced by “real time” on-line accounts and by 2020 businesses will be able to link their accounting software straight to the HMRC on-line account. Sounds great in theory, and whilst HMRC are still in consultation, for Sole Traders and Partnerships in my opinion this will increase the administration burden rather than lighten it. A lot of small businesses only prepare accounts annually, potentially under this regime interim accounts will need to be submitted, or if the accounting software is feeding straight into the HMRC account then figures will need to be checked before submitting.
At the moment I am working with clients to manage these changes, looking at taking additional dividends where they can before the end of the tax year. The payroll costs are going to be the biggest burden, and devloping a strategy to deal with these changes. For a lot of clients it is managing staged price increases rather than absorbing the additional costs, as all businesses are facing the same issues. For clients that are competing with overseas imports it’s going to be tough.