Budget - Summary 2015
09 July 2015
Set out below are my comments on yesterday's budget that I want to draw to your attention. This is not designed to be comprehensive but to give some context and emphasis to what is an extremely long and complex list of changes.
If you have any questions on these points or anything I do not cover but you read about please ring me.
Clearly what I say below is just for discussion and does not represent advice. Please contact me for detailed specific advice before acting on anything.
9 July 2015
For anyone owning shares in a private limited company and receiving dividends this will be the main item to catch your attention. Since the introduction of corporation tax in 1965 government has recognised that income received as a dividend from any limited company has already suffered corporation tax and some level of credit has been afforded to reflect this in an individual's personal tax liability. From April 2016 this credit, which is currently 10% is to be removed. The justification put forward is that worker shareholders in limited companies are foregoing salaries to leave more money in the company to draw as dividend thereby depriving the exchequer of national insurance. Clearly there are many shareholders in employee owned companies and listed companies who were not doing that but are equally affected.
The introduction of a tax free dividend allowance of £5,000 will ameliorate the impact of this for some taxpayers but the introduction of a 7.5% rate of tax for basic rate taxpayers in receipt of dividend income will make many a lot worse off.
The effect of this is as follows:
For a higher rate taxpayer ie someone in the 40% band. Currently a £100 pre tax profit in a limited company will yield a post tax profit of £80. If this is all paid out in dividend it will attract a liability to higher rate tax in the hands of the shareholder of £20 leaving net income of £60. An overall rate of tax of 40%.
From April 2016 the same situation will give the taxpayer a liability to higher rate tax of £26 leaving net income of £54. An overall rate of tax of 46%.
Additional rate taxpayers (45%) are similarly affected.
This may give rise to the following planning considerations:
- Should dividends be advanced into the current tax year ie paid before 6 April 2016.
- Is it better to charge interest on loans made to the company by the shareholder.
- Is there a possibility of charging rent on buildings owned personally but used by the company.
I may have more ideas in due course. Food for thought.
Overall dividends still look good value compared to salaries.
There is a lot of undercurrent here to say the objective is to discourage the use of limited companies merely because there are tax savings surrounding dividends.
Rates to be reduced to 19% in 2017 and 18% in 2020. Reduces the effect of the above issue with dividends a little bit.
Annual Investment Allowance
This is capital allowances in respect of plant. This will fall from £500,000 to £200,000 from January 2016. If your year end straddles this date there can be some funny effects so we need to speak if you are planning substantial capital expenditure.
Insurance Premium Tax
Increases from 6% to 9.5% later this year. Apparently justified by lower cost of motor insurance. If premiums are substantial it may be worth looking at paying for a longer period before rates increase in November.
National Living Wage
We are now faced with regulation covering national living wage affecting over 25s. This is in addition to regulations covering national minimum wage. From April 2016 all over 25s will have to be paid a minimum of £7.20 per hour, this is targeted to rise to £9 by 2020. It is clear from the rhetoric that this is designed to take people out of claiming benefits.
National Insurance Employment Allowance
This is currently paid to all employers at the rate of £2,000 per annum. This will rise to £3,000 per annum from next April but single employee companies will be excluded. Once we see the detail the latter may wish to look for paid work for family members to do to assist them.
Now this looks complicated. Possibly a shadow of what was expected.
From 2017/18 (so tough if you die before then) each party to a marriage will get extra inheritance tax relief if they have a house in their estate when they die. This extra relief started at £100,000 each and rises to £175,000 each in 2020/21. A theoretical allowance of £1.0 million between a married couple. Allowance is transferable if unused to the survivor.
If you sell the property to downsize and invest in something else you retain the relief at the previous level. Records will need to be kept.
If the total estate exceeds £2.0 million the extra relief gets progressively withdrawn.
Lifetime allowance to reduce to £1.0 million from April 2016.
Annual allowance to reduce progressively from £40,000 to £10,000 for those earning (including pension contributions) over £150,000.
On the other hand recent changes making pension more flexible and reduced charges to tax on death are helpful.