The Chancellor, George Osborne, delivered his Budget speech on 8 July 2015, in advance of publication of Finance Bill (No 2) 2015 on 15 July 2015. This news item outlines some of the key changes relating to owner-managed businesses.
Income tax rates
Some of the headline announcements from the Chancellor related to income tax for individuals. These include:
> the increase in the personal allowance to £11,000 from 2016/17 and £11,200 from 2017/18
> the increase in the higher rate threshold to £43,000 in 2016/17
> the introduction of a taper to the annual allowance on pension contribution relief for those with incomes, including pension contributions, above £150,000 to a minimum of £10,000 (Summer Budget 2015 report, para 2.83)
> the introduction of a tax lock to rule out increases in the main rates of income tax (VAT and NI) over the course of this parliament as announced in the Queens Speech earlier this year
Corporation tax rate
The Chancellor announced the main rate of corporation tax will fall to 19% from 1 April 2017, reducing to 18% from 1 April 2020.
Small companies proprietary directors / owner managers
Whilst the above change will be welcomed by many small company owner / directors, it is clear that the government is concerned about imbalances in the tax system, notably the cost of tax incentivised incorporations. There are a number of measures which are likely to create an additional tax burden for these individuals going forward.
These are as follows:
> the abolition of the Dividend Tax credit from April 2016 (see below) is likely to increase the tax burden on owner managers who traditionally use dividends as a preferred profit extraction method
> the increase to the Employment allowance by £1,000 to £3,000 from April 2016 is welcome, but watch out if the Director is the sole employee as the allowance will no longer be available (Summer Budget 2015 report, para 1.198)
> further scrutiny on the IR35 legislation, with HMRC being tasked to start a dialogue with business on how to improve the effectiveness of the existing legislation (Summer Budget 2015 report, para 1.181)
> the Office of Tax Simplification to review closer alignment of income tax and NICs and the taxation of small companies (terms of reference to be published shortly), probably another mechanism to close the tax gap (Summer Budget 2015 report, para 1.245)
In Finance Bill 2016 the government will legislate to reform the basis of dividend taxation. They have outlined that they will abolish the Dividend Tax credit from April 2016 and introduce a new Dividend Tax allowance of £5,000 per year. The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate tax payers. Dividends in pension funds and ISAs remain tax free.
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