National Insurance
Summer Budget 2015: Key tax changes for entrepreneurs
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Listen to an audio version of this Summary Budget 2015 round up of the key tax changes impacting on entrepreneurs or read the text version below:
An audio download link is available at the end of this post!
Reduction in Corporation tax
Continuing George Osborne’s pledge to make the UK one of the single most attractive places to do business in the G20 he continued with his downward pressure on the UK corporation tax rates. Not content with reducing the main rate to 20% from 28% not too many years ago, he pledged to reduce it further to 19% by 2017 and down to 18% by 2020.
Before we get too excited about the CT rate reductions, it was once again a “give and take budget” as Mr Osborne announced some far reaching changes to the dividend tax regime that will impact on many entrepreneurs and increases to the minimum wage – the now so called “Living Wage”.
Dividend tax changes
It has long been the case that entrepreneurs could extract profits from their companies as dividends rather than salary – the key advantage being NIC savings as dividends are not (currently) subject to NIC. The income tax suffered on dividends is lower than salary as dividends are only available from retained profits that have been subject to corporation tax – so a tax credit system is applied to dividends that, in essence, results in 0% income tax payable by basic rate tax-payers (so broadly up to £42,000 – £43,000); 25% of the net dividend payable for higher rate tax payers and 30.6% for additional rate tax payers.
Seemingly forgetting about the double taxation impact on dividend payments, the Chancellor announced that there will be a £5,000 dividend allowance from 6 April 2016 (whoop whoop!) and then a 7.5% additional tax applied to dividend income – so our rates now become basic rate: 7.5%; higher rate: 32.5% and additional rate: 38.1%.
Looking at the HMRC projected figures, they are looking to net quite a windfall on this change that is a tax grab via the back-door – I don’t think many entrepreneurs have quite grasped this change as it was positioned as a change that might impact on those with substantial quoted shareholdings and contractors.
Will we see larger dividend payments pre 5 April 2016 with founders leaving credit loan balances to draw down over the foreseeable future?
Employment allowance increase
We should see the £2,000 NIC allowance for employers increase to £3,000 from 6 April 2016
Annual investment allowance
The annual allowance for investment into capital equipment (e.g. PCs, servers, desks, chairs, machinery etc) was set to fall to £25,000 pa by the end of this year but this was increased and pegged at £200,000 for the next five years.
EIS restrictions
There were some further changes to EIS building on proposals from the Autumn Budget Statement that include proposals to cap the total amount that can be raised under EIS at £12m (£20m for ‘knowledge intensive’ companies).
Also, a new limit on companies raising EIS making it available only to those companies that have been trading for less than 7 years (10 years for knowledge intensive companies) – this change seems unreasonably harsh for longer more established companies that might want to access capital. The requirement for 70% of the SEIS cash to be invested before shares can be issued under EIS will also be removed as originally noted in the March 2015 Budget. Finally there was reference to ensuring that EIS funds are directed toward developing companies so there will be restrictions on using EIS monies for buyouts and acquisitions and more of a need to demonstrate that the funds are being employed to develop and grow trading companies.
There were no changes announced to the SEIS regime.
R&D tax credits
No significant changes announced for R&D tax relief aside from a restriction aimed at Charities and Universities to prevent them from claiming the R&D tax relief on work subcontracted to them. This restriction takes effect from 1 August 2015.
Buy to let landlords
Many entrepreneurs will have diversified their risk with potentially one or more buy to let properties within their portfolio. These were also hit with some quite serious changes to the tax regime with the most hard hitting being the reduction in interest relief on buy to let mortgages being reduced to the basic rate of tax only. Currently, landlords can offset the mortgage interest at their marginal rate of tax (so potentially up to 45%). These new rules will be phased in to ease the pain of potential deleveraging for some landlords but the writing is on the wall for many – and who’s to say that this is the end with potential for 0% interest relief in the future….?
There will also be the removal of the 10% wear and tear allowance from 6 April 2016. Yet more pain for landlords.
Pension changes
On the downside, there were announcements that those with total income over £150,000 would be hit with reductions in the amounts they can put into their pension with the £40,000 annual allowance being tapered away with it hitting just £10,000 for those earning £210,000 or more. This is a admin headache all round and it comes into force from 6 April 2016.
On the plus side, there was a consultation announce to explore the best ways for pensions to be saved and a seemingly open approach to considering alternative finance in line with improvements to ISAs – this is great news for our thriving Fintech sector.
Inheritance tax changes
Long discussed and unsurprising was the pledge to increase the inheritance tax level to £1m to allow homes to be passed on without incurring IHT. Slightly odd in that the £325,000 nil rate band remains in place for the next 5 years but we have this additional £175,000 especially for the family home. Inflation may start to dig a hole into that £325,000 allowance rendering this less beneficial over time than the headlines suggest.
It was a shame that we didn’t see any changes to the VAT MOSS / (#VATmess) regime and I think the changes to dividends and pensions will add to uncertainty for many entrepreneurs and their advisors as the goalposts keep moving which is disappointing.
Don’t forget National Insurance (NIC) holidays for business startups
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If your UK business start-up was set up on or after 22 June 2010 then you may be eligible for a 12 month holiday from employer’s national insurance contributions – normally payable at a rate of 13.8% on employees’ and directors salaries in most cases.
This incentive, aimed at boosting the number of business startups in certain areas (like the north west), has been around for over a year now but many new businesses still seem to overlook it.
We are busy saving new businesses up to £50,000 so it is well worth looking into further if you think it might apply to your new business. Drop me a line if you would like to enroll for this NIC holiday or if you would like to ask any specific questions.
National Insurance Contribution (NIC) Holiday Scheme for businesses – What’s it all about?
Yesterday saw the formal launch of the Regional National Insurance Contribution (NIC) holiday for businesses started between 22 June 2010 and 5 September 2013.
This tax incentive announced in the June 2010 Emergency Budget allows for a 12 month break from paying employer’s national insurance contributions (currently 12.8% going up to 13.8% from 5 April 2011) on the first 10 employees.
The relief is limited to £5,000 per employee (so £50,000 in total) although it is difficult to foresee in practice how the majority of startup businesses will obtain full benefit for this relief given that new recruits would have to be paid approx £45,000 each to trigger a £50,000 employer’s national insurance liability?
It’s a welcome tax saving all the same to encourage new business start-ups (particularly in the North West), although there are plenty of points to watch – here are just a handful:
NIC holiday points to watch:
- You must apply for relief under this scheme – it is not an automatic entitlement. You can apply in paper or online.
- Business start-ups qualify for the first 10 employees recruited during the initial 12 month period. The “initial period” begins on the day the new business commences trading or the date on which the first employee is recruited, whichever is earlier – this cannot be before 22 June 2010.
- Each qualifying new employee receives a 12 month “holiday” provided this period does not cross the 6 September 2013 end date.
- ‘Principal place of business’ determines whether your startup qualifies for the relief. Certain geographical areas do not qualify (mainly London and South East) but you can foresee situations where this may not be clear (even though the guidance suggests otherwise) – there is, however, a Region Finder search tool available to assist. For example, those tech businesses that are primarily online or virtual, HMRC will look to where your books, records and equipment are kept. For those that seem to be split fairly evenly between UK locations, then HMRC will look to where the head office is as a key indicator of location.
- In addition to sole traders, partnerships and companies, property investment businesses and charities are also included as qualifying. Managed service or IR35 income companies do not qualify.
- Employer’s Class 1 national insurance contributions can only be withheld from the date of official launch i.e. 6 September 2010. Businesses started before this date cannot claim relief from employer’s national insurance until post 5 September 2010.
- Those new employees paid less than the employer’s national insurance threshold (currently £110 per week) still count toward the 10 employees even if there is no monetary saving for the new business. Similarly, part-time and casual staff individually count for the 10 employees limit – this provides an opportunity for planning with respect to the order of recruits i.e. ideally recruit senior / management team first (the Business Link guidance specifically states that if more than 10 employees join at once then you are free to choose which ones count toward the 10 employee limit).
- Anti-avoidance legislation is in place to prevent existing businesses from ceasing and restarting substantially the same activities within 6 months to take advantage of the scheme.
- Class 1A NIC on benefits in kind are unaffected as are the normal monthly employee NIC deductions which must be paid over in the normal way.
- You must retain the letter or email from HMRC that authorises you to operate the NIC holiday scheme.
- The NIC holiday scheme is not yet law. The relevant law should be passed around January 2011 so businesses have a choice – either apply now and risk banking the savings (if the law is not passed the employer’s NIC will be due and payable on 19 April 2011) or wait until the law is passed and apply for a refund for the intervening period
HMRC have prepared a flexible form to help calculate and monitor the amount available to withhold under this scheme.
So what appeared to be a straightforward initiative to promote much needed UK startups proves to be a little more tricky in practice although, with a little advance planning, this incentive should provide at least some tax cash savings for new businesses during their tricky first year of trading.
The above information is for educational and entertainment purposes only. It does not constitute professional advice. Please seek advice specific to your circumstances and particular facts. You can contact me if in doubt.
Conservative Manifesto – What does it mean for your business?
“Our ambition is to create the most competitive tax system in the G20 within five years.We will restore the tax system’s reputation for simplicity, stability and predictability.”
David Cameron and the Conservative Party launched their manifesto for the impending May 2010 election today.
So what were the key points for business?
- Emphasis is made of (re)introducing a simplified, more stable and certain tax regime. There is little doubt that small and large businesses alike are confused by the levels of bureaucracy and red-tape mixed with constant meddling in the UK tax system of late. An intention to introduce stability and certainty must be welcome. Mention is made of introducing an Office of Tax Simplification – did I just say plans to reduce bureaucracy……?
- Tinkering with the planned increase in employer’s National Insurance – there appears to be a white elephant in the room here. Everyone seems to have been caught by the Tories’ proposed abolition of this “tax on jobs” when in fact the manifesto does not propose to abolish the 1% increase due in April 2011 but instead to tinker with the relevant income thresholds to make it apply to less employees and employers than would previously be the case – did I just say less meddling and increased simplification….?
- Reduction in the standard rate of corporation tax for companies from 28% to 25%. Small companies rate to be cut from 21% to 20%. Further cuts to follow. But how will this be funded? By simplification – if so, what does this mean for the future of capital allowances for expenditure on fixed assets like plant and equipment….? Is the end nigh?
- One year tax holiday from employer’s National Insurance for the first 10 employees of start-ups during the Conservatives’ first 2 years in Government
- Research and Development tax credits (R&D tax credits) will be improved and refocused on hi-tech companies, small businesses and new start-ups. Pretty much verbatim out of Dyson’ report as commissioned by the Tories – will the increase from 175% to 200% tax deductions be implemented….?
- Cut red tape to enable businesses to be started quickly. A one-click registration model for new businesses rather than sifting through endless forms. Sounds interesting – we await the detail.
- £2,000 bonus for every apprentice hired by SMEs
- Increased accessibility for SMEs to public sector contracts
- No mention of VAT….?
- Little mention of headline income tax rates….?
Is this enough support to help your business?