The end of tax motivated incorporation?

The Summer Budget 2015 contained some key measures that were a thinly veiled attack on small business owners. What do you need to be aware of?

Dividends. Perhaps the most controversial announcement was the overhaul of tax on dividends. From April 2016 the notional credit system (which sees basic rate taxpayers pay no tax on dividends) will be scrapped, and instead a new dividend allowance of £5,000 will be introduced. Anything received above that will be taxed at 7.5%, 32.5% and 38.2% for the basic, higher and additional rates respectively.

After some initial confusion as to how this allowance will work in practice, HMRC has now confirmed that all taxpayers, regardless of their marginal rate, will benefit from the first £5,000 of dividend income tax free – essentially it is a special type of personal allowance.

One-man companies will be severely affected by this. Those following the traditional advice of taking a notional salary and topping up to the basic rate band with a dividend will see their tax bill increase by around £1,800 – enough to trigger payments on account.

Employment allowance. In a second swipe at micro companies, it was also announced that the allowance which reduces the NI liability for companies will no longer be available where the only employees are the directors (one-man bands, husband and wife set ups etc.). This will also be effective from April 2016.

Goodwill amortisation. Finally, the announcement that there will be no allowable deduction for the cost of purchasing the goodwill element of another business or trade from 8 July 2015 will affect businesses that buy the trade of small competitors or retiring persons.

 

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