The Chancellor believes saving tax is a key incentive driving many businesses to become limited companies. The Chancellor wants to reduce this incentive by using two measures announced in the July 2015 budget.

These measures are ……

• The removal of the Employers Allowance from companies where the director is the sole employee – saving £80M per year in 2016-17 rising to £110M per year in 2020-21;

Employers Allowance is the first £2,000 of employers NI being waived (£3,000 in 2016 17).

And more significantly

• Reforming Dividend Tax – saving £190M per year in 2016-17 rising to £565M per year in 2020-21.

Effective tax rates on Dividends received depend on the individual’s gross income.

The new measure will be that the first £5,000 dividend is tax-free, after which taxes on all dividends are being increased by 7.5%.

Base Band (as 20% income tax) effective rate 0% increases to 7.5%

Higher Rate Band (as 40% income tax) effective rate 25% increases to 32.5%   …. and so on

This tax will be applied to all dividend income not just dividend income from closed companies.

The Effect:

Although the exact details of implementation have not been clarified at the time of writing this document, the numbers below quantifies the expected effect of these measures on one-person incorporations.  Income being the money the business makes after allowable costs and before owners salaries or drawings. Annual savings are :

Income          Tax Saving from One-Person Incorporation

£20,000          2015/16  £    912     new system £       471 savings reduction of £   441

£30,000          2015/16  £ 1,812     new system £       771 savings reduction of £1,041

£40,000          2015/16  £ 2,712     new system £   1,071 savings reduction of £1,641

£50,000          2015/16  £ 4,408     new system £ 2,894 savings reduction of £1,514

£60,000          2015/16  £ 4,639     new system £ 2,651 savings reduction of £1,988

£70,000          2015/16  £ 4,839     new system £ 2,251 savings reduction of £2,588

£80,000          2015/16  £ 5,039    new system £ 1,851 savings reduction of £3,188

£90,000          2015/16  £ 5,239    new system £ 1,451 savings reduction of £3,788

The savings will vary due to individual circumstances so please seek professional advice to ascertain exactly what savings you can make.

These savings levels can be significantly increased if the business is formed with two directors and/or shareholders – having one’s spouse being involved with the business can be very tax efficient. More

Don’t Worry!

HMRC has started to write to a number of taxpayers who are claiming for professional subscriptions that are shown on Self Assessment Returns and reflected in tax codes.

This is part of a research project and not every taxpayer will get the letter, the letter will not be copied to me so I will not know you have obtained the letter.

The question posed in the letter is a fairly simple one – “are you still paying subscription to XYZ institute or not”.

If you receive the letter you just need to reply back in writing on the form provided with the letter (send it back to Bootle) and not worry!

• It is not a start of a tax enquiry.
• If you get the letter and have any questions please contact me.