Last month’s summer budget was always going to be the Chancellor’s best opportunity to raise tax in an effort to reduce the budget deficit; despite a declared commitment to those small businesses that are apparently driving the nation’s economic recovery this post election budget directly targets small, privately owned limited companies.
Regarded as the back bone of the Conservative electorate, on this occasion he is also the cash cow under attack to fund those headline grabbing tax giveaways; the increase to the ‘national living wage’, increased inheritance tax thresholds for homeowners, personal allowance increases, childcare subsidies and freezes to fuel duty.
Aside from the minor increases to insurance premium taxes, this budget has announced major reform to the way company dividends are taxed and on the use of pensions to provide a meaningful income in retirement.
Changes to dividend taxation rates will see small business owners pay an additional 6.8 billion more in tax over the next 5 years. The present reality is that a top rate tax paying business owner can pay himself dividends out of company profit at an effective rate of 30.6%; a comparable personal income payment would see income tax charged at up to 45% plus any additional National Insurance.
From April 2016 this figure will rise to 38%; there will be an end to the notional 10% tax credit which allows non and basic rate tax payers to receive dividends with no further liability as any tax is deemed to have been paid.
In future all taxpayers will have a tax free dividend allowance of 5,000, above this figure the effective tax rate will increase by approximately 7.5%.
The second aspect of this assault on the business owner’s income is an attack on his ability to shelter it within a pension.
We have already seen repeated limits placed on the size of maturing pension pots with the lifetime allowance reducing from 1.8M in 2012 down to 1M from next year. Annual contribution limits have fallen too; first reduced in 2012 to 50K per annum, 40K in 2014 and now a tapering reduction will effectively apply to anyone with total remuneration (PAYE plus dividends) in excess of 110K per annum.
A company director with total remuneration of 200K per annum may choose to receive his earnings in the form of taxable income at 20K, pension contributions at 40K and dividends at 140K; from April 2016 his pension contribution could not exceed 10K forcing him to increase the dividend to 170K resulting in a total tax increase of 19,680 or almost 10%!
This is surely a most cynical manoeuvre to penalise the very people the Government claims to champion. If you would like to discuss this article or any other aspect of your business Ellison’s Financial Planning is working on ways to ease your pain.