Welcome to our monthly tax newsletter designed to keep you informed of the latest tax issues. In this issue we focus on tax changes announced in the Summer 2015 Budget which outlined the tax plans of the new Conservative government to be introduced over the next 5 years.
We hope you enjoy reading the newsletter; remember, we are here to help you so please contact us if you need further information on any of the topics covered.
NEW “NATIONAL LIVING WAGE” TAX CREDIT CHANGES
The most radical announcement by the Chancellor on 8th July was a significant reduction in the amount the government plans to spend on tax credits and other State benefits. At the same time he announced that there would a new national living wage to be paid by employers, rising to £9 an hour by 2020. This strategy combined with the increase in the personal allowance to £11,000 for 2016/17, and eventually £12,500, means that employees will keep more of what they earn but the tax credits received to top up their income will be significantly reduced.
Employers will need to assess the impact of this change on the profitability of their business and we can help you consider this in more detail as there are other factors such the increase in the employment allowance to £3,000 next year and the planned reductions in the corporation tax rate that may also be relevant to your business.
CORPORATE TAX RATE TO BE CUT TO 18%
The current UK corporation tax rate of 20% is the lowest rate in the G20, the 20 major trading nations. This rate continues to apply until 2017 when it has been announced that the rate will be reduced to 19% and then 18% in 2020.
This appears to make trading via a limited company more attractive but note that there are significant changes to the taxation of dividends that take effect from 6 April 2016.
CHANGES TO TAXATION OF DIVIDENDS
The Chancellor has announced that from 6 April 2016 there will no longer be a notional tax credit associated with dividends received and the following rates will apply after a £5,000 tax free dividend allowance:
Basic rate taxpayers - 7.5 %
Higher rate taxpayers - 32.5 %
Additional rate taxpayers - 38.1 %
This will mean that from 2016/17 individuals will be able to receive up to £17,000 tax free:
Personal allowance - £11,000
Tax free interest - £1,000
Tax free dividends - £5,000
IMPACT OF CHANGES TO DIVIDEND TAXATION ON FAMILY COMPANIES
A common strategy that we often advise to family company director/shareholders is that they extract profits from their company by way of dividends instead of paying themselves a salary. This is because there are no national insurance contributions on dividend payments and where the dividend income falls within the basic rate band (up to £42,385 for 2015/16) there is currently no income tax on dividends.
Where both husband and wife are directors and shareholders they will be able to pay themselves a salary of £11,000 each and then dividends of £5,000 each tax free. However the next £27,000 of dividends up to the new £43,000 higher rate threshold would be taxed at 7.5 % resulting in income tax of £2,025 each being payable for 2016/17. Under the current rules there would be no tax on such dividends up to £42,385.
This measure has been introduced to counter tax-motivated incorporation to level the playing field between trading via a company versus an unincorporated business.
Note that dividends received in excess of the £43,000 higher rate threshold will be taxed at 32.5 % but without a notional credit thus increasing the effective rate from the current 25 % to 32.5 %.