How the summer budget affects small businesses
Last month’s summer budget had a smattering of good news for the UK’s legion of small and medium sized businesses (SMEs) but the changes to dividend tax could have a big impact on many. The measures introduced could have some significant tax and financial planning implications.
The reduction of corporation tax to 19% in 2017 and 18% in 2020 is welcome news but as many UK start-ups and SMEs generate only a marginal profit, the impact is likely to be minimal.
The change to the National Insurance Employment Allowance is also welcome. This has been increased from £2,000 to £3,000 and will help SMEs reduce their wage bills. However, the new Living Wage of £7.20 per hour will offset this to some extent, and in some cases the tax reductions are unlikely to cover the cost increases.
Another positive measure is the ‘fixing’ of the new Annual Investment Allowance to a new level of £200,000. This means that SMEs can make tax-deductible investments in equipment, plant and machinery. Many felt that the allowance might be cut to £25,000, so this new, long-term rate should be a help to SMEs going forward. Bear in mind, though, that an allowance of £500,000 had been in place for almost two years.
On the negative side, the changes to dividend tax could see many small business owners hit quite hard. Whilst some business owners may end up paying less, those who pay themselves the top rate will certainly be affected significantly.
Under the new rules, the first £5,000 of dividend income will be tax exempt. After that, tax will be charged at three different rates; 7.5% for the dividend income that falls into the basic rate tax band, 32.5% for dividend income falling into the higher rate band; and 38.1% for dividend income that is charged at the additional rate. For many, this will represent a tax increase of around 25%.
Currently, many SME and family business owners keep their salaries low to ensure that their business has the cash it needs to invest and grow. They can then receive additional dividend payments based on the profitability of the company. Under the new rules, they will not only see significant tax rises but also added complexity to income tax calculations. The changing tax rates mean that SMEs may now need to consider the timing of dividend payments.
According to the Daily Telegraph and tax experts at KPMG, the changes may also see many SME owners looking either to sell up or cut investments before the rules are introduced. Small business owners who are top rate tax payers currently have the option of growing their business and paying themselves dividend income at a 30.6% tax rate, or selling the company and paying capital gains tax at a rate of 28%. From next year, the top tax rate increases to 38.1%, while capital gains tax is set to remain at 28%. It means that selling your business rather than continuing to receive dividends from trading will become attractive for many small business owners.
The summer budget has certainly provided much for small business owners to mull over. To help you digest the new changes and make the right tax and financial planning decisions, contact Kellands.