The Summer Budget 2015 introduced a number of measures which will directly impact small incorporated businesses:
Employment allowance
From April 2016 the employment allowance which currently allows an employer to reduce their employer’s NI by £2,000 a year will be increased to £3,000 a year. This allowance will however no longer be available for companies where the director is also the sole employee.
Corporation tax
Corporation tax is to be reduced from 20% in 2016, to 19% in 2017 and 18% in 2020.
Annual investment allowance
This allowance which gives full tax relief to business investments in assets and equipment will be reduced from £500,000 to £200,000 from 1 January 2016.
Tax on dividends
From April 2016 the current system of tax credits is to be replaced with a dividend tax allowance of £5,000.
Additionally, effective dividend tax rates will be increased to 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band. The current rates are 0%, 25% and 30.56% on the net income.
Income tax
From April 2016 the personal allowance will increase from £10,600 to £11,000 and the higher rate tax threshold will increase from £42,385 to £43,000.
IR35
Contractors should note that the government will be conducting a review of IR35 to “improve the effectiveness” of this legislation as it is currently considered insufficiently robust.
From April 2016, structuring through a limited company will still be more tax efficient than operating through an umbrella company or as a sole trader – only less so than is currently the case. Operating a limited company will still facilitate more tax planning opportunities, allow for a greater range of allowable expenses to be claimed and keep business and personal assets separate. A company also has the cash flow advantage over a sole trader of not having to make payments on account to HMRC.
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