The new dividend allowance will represent a significant tax increase for owners of small companies who have for some years been able to extract profits from their business with a tax efficient mixture of salary and dividends.
In 2015/16 Paul takes a dividend of £18,000 net (£20,000 gross) from his own company. His only other income is a small salary below the tax and national insurance limits. Currently he pays no tax on both the salary and dividends.
In 2016/17 Paul takes a dividend of £18,000 (gross, no tax credit) and a similar salary to 2015/16 above. He pays tax at 7.5% on £13,000 after deducting the dividend allowance of £5,000, resulting in a tax liability of £975.
Annual Investment Allowance
This allowance is the maximum amount a business can spend on equipment in one year and get full tax relief in that year. The allowance will be increased to £200,000 from 1 January 2016.
From 1 April 2015, the main rate of corporation tax is 20% and this will continue for the 2016/17 financial year. The main rate will then be reduced as follows;
- 19% for the financial years beginning 1 April 2017, 1 April 2018 and 1 April 2019
- 18% for the financial year beginning 1 April 2020.
From April 2016, the government will increase the National Insurance Employment Allowance from £2,000 to £3,000 a year. The increase will mean that businesses will be able to employ four workers full time on the new National Living Wage without paying any national insurance.
To ensure the Employment Allowance is focussed on businesses and charities that support employment, from April 2016, companies where the director is the sole employee will no longer be able to claim the Employment Allowance.
If you require any further information on how the budget affects you and your business please give us a call.