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July 21, 2015

Summer Budget delivers bad news for small businesses

Last week, in his second budget of the year, George Osborne delivered a series of measures that in our view, will hit small business owners hard.

Firstly, the Chancellor said he will make it more taxing for people who pay themselves in dividends by replacing the Dividend Tax Credit from April 2016 with a new tax-free allowance of £5,000 a year for all taxpayers, who will then be taxed at 7.5% thereafter.

While some business owners may pay less tax as a result, top-rate tax payers, who currently have the option of growing their business and paying themselves dividend income at a 30.6% tax rate will find that the top rate of tax on dividend income will rise to 38.1%.

Clearly, the higher the income, the greater the impact and this will directly hit business owners’ take home cash. According to industry experts, this new tax raid will equate to an additional £1,500 in tax for every £20,000 of dividend over £5,000 netting the Treasury an additional £6.8bn.

In addition, the Chancellor announced the Employment Allowance (EA) will increase to £3,000 from April 2016 (partly to counteract the additional costs to small businesses from the introduction of the National Living Wage). However, there was a second blow to business owners who are the sole employee of their own limited company as they will be no longer be eligible to claim EA.

For the small business sector, this Budget represents a bit of a ‘mixed bag’ of results. On the one hand, some eligible firms will welcome the increase in EA; however one-person limited companies will be hit by the changes to the dividend tax regime and lose out on the EA.

So what can business owners do to prepare for the changes? While the new Budget announcements are not in force yet, it makes good sense to understand the wider implications and plan ahead now. Here are some Budget busting tips for businesses:

• If you are a director of a one person company, consider taking on an employee to avoid losing your Employment Allowance
• Plan ahead before April 2016 with the timing of your dividend declarations – pay yourself more dividends this year before the new rates apply next year
• From January 2016, the Annual Investment Allowance (AIA) will be set at £200,000 from its current rate of £500,000. Use your capital allowance before the end of the year
• From 1 November this year, Insurance Premium Tax (IPT) will rise from 6% to 9.5%. Beat the hike by renewing your cover and paying upfront for your policy rather than by monthly instalments

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