Summer Budget 2015
This was probably the most radical Budget for small business for many years. One has to admire George Osborne for the sleight of hand in presenting the Budget as being pro-business whilst at the same time making sure that a very large number of small businesses pay a significantly larger share of their income in tax than before. And the clever bit is that we can't really complain about it!
Let me explain. A typical small business making a profit of say £40,000 would normally be structured as a limited company with the owner paying himself or herself a salary of £10,000 and paying corporation tax at 20% on the remaining £30,000 - total tax £6,000. £30,000 less tax leaves £24,000 to be taken as dividends, which would not have attracted any more tax. From April 2016 the first £5,000 of dividends is tax-free but the rest (£19,000 in this case) will be subject to tax at 7.5% - £1,425 on top of what the business pays. For higher levels of profit it is just an extra 7.5% on anything taken as dividends.
So why haven't you heard any complaints in the press about an attack on small business? Because we all know that we have had it good for a long time. We just didn't expect the government to find such a simple and effective way of dealing with this anomaly. As business owners we all know that we pay a considerably lower rate of tax than our employees, who pay 12% employee NIC on every £1 that they earn over £8,000. So I don't think that there will be a big rush for business owners to pay themselves under PAYE, they are just going to have to accept that they will pay more tax than in the past.
Let's face it those of us who have enjoyed a pretty low rate of business tax are not going to like paying more, but in many ways the dividend tax is preferable to some other measures that might have been introduced.
So, what about the good news in the budget? The grossing up of dividends for the 10% tax credit disappears so it should be possible to take slightly higher dividends before hitting the 40% tax threshold. The employment allowance rises from £2,000 to £3,000 which will be helpful for all businesses with employees. Corporation tax will reduce progressively from 20% to 18% over the next two years which gives us a very competitive rate of business tax. And finally the annual investment allowance will be fixed at £200,000 from January 2016 which gives more certainty about tax relief of fixed asset investment.
Property landlords will be affected by the restriction of interest relief to the basic rate. A fairly radical change which will significantly affect landlords who are relatively highly geared and are claiming substantial interest relief against their letting income.
Finally, the extra relief for Inheritance Tax which will be phased in over the next few years will be very welcome to the wealthier, particularly those that are reluctant to give too much of their assets away to their children.
Let's face it none of us who have benefitted from paying low business taxes are going to like paying more tax, but in many ways this is preferable to some other measures that could have been introduced.