As if life is not difficult enough for the small business owner at the present time, there are some changes that come into effect from April 2016 which are likely to affect us and we need to be careful to ensure that we are complying with the new legislation.
National Living Wage
A significant change for many small business owners is likely to be the National Living Wage (NLW). Coming into effect from April 2016, employers of anyone aged over 25 are obliged to pay at least £7.20 an hour.
While this might not seem overly onerous, often small employers try to keep costs down by paying their staff a relatively modest hourly rate and furthermore, those small business owners that have a limited company may pay themselves a low salary plus dividends to reduce their tax bill; such directors also need to ensure their own hourly rate is in excess of the NLW minimum.
It is not completely clear of the consequences of not meeting the NLW threshold as yet but using the National Minimum Wage (NMW) legislation as a reference, we can expect fines and a process of naming and shaming those that are in breach of the rules. In addition to NLW, the NLW rules have been in force and HMRC in recent times has started to get very tough with any employers that are in breach of these rules.
Though it is also not officially documented anywhere, any business owners that are in breach of such legislation and identified may find their chances of successfully bidding for any public service contracts also severely impeded.
The New Dividend Tax Regime
This change affects any business owner at the helm of a limited company who is declaring dividends as part of their income. The new legislation comes into effect from 6 April 2016 and affects anyone extracting profits from their company as dividends.
At present, when a dividend is declared, it is paid to the shareholder subject to different tax rates to other forms of taxation. This is because a ten per cent notional tax credit is added to the dividend. This means that for anyone who has a dividend income falling into the basic tax rate, the tax rate is effectively zero, as the ten per cent credit offsets the tax liability.
Anyone who is a higher rate or 40 per cent tax payer, the effective rate of tax on the dividends is 25 per cent.
Unfortunately, from 6 April 2016:
- The ten per cent dividend tax credit ceases to exist, meaning that amount of dividend will be the amount that is subject to tax.
- New rates of tax on dividends will 7.5 per cent for basic rate tax payers, 32.5 per cent for higher rate tax payers and 38.1 per cent for additional tax rate payers
- On the positive, a new dividend tax allowance means that the first £5,000 of dividends will be exempt from tax altogether.
Interestingly, there are winners and losers from the new tax regime:
- A winner from the new regime could be someone who is a higher rate tax payer who has dividend income of £5,000. In the past they would have a tax liability of £1,250 (25 per cent of £5,000). In the new regime their tax liability would be zero.
- A loser under the new regime will be the sole shareholder of a company (a typical scenario for many small business owners) who pays themselves a small salary and the rest as dividends up to the threshold at which higher rate tax is payable. Under the current rules, no income tax is payable on the salary (if it is below the tax threshold due to their personal allowances) and no tax is payable on the dividend. Under the new rules, the first £5,000 of the dividends is free of tax, and if (for example) they draw a dividend of £30,000, £25,000 will have tax payable against it of 7.5 per cent, meaning that £1,875 of tax is payable.
An obvious question to ask would be are dividends still the best way of paying those of us small business owners of limited companies? Obviously, it is worth anyone unsure, getting advice from their account or financial planner but it is my view, that while this development is disappointing and going to negatively affect us, dividends are still more tax efficient that wholly paying a salary.
Scottish rate of income tax (SRIT)
Anyone who has been resident in the UK and had their main place of residence with a Scottish postcode for 183 days or more in this tax year are now being contacted by HMRC to confirm they will be subject to SRIT from April 2016. The effect of SRIT is that some of your income tax will be paid to the Scottish government. The actual amount of tax paid in Scotland will remain the same as the rest of the UK (for now) but broken down between rest of the UK and Scotland. This applies to wage, pension and many other types of taxable income.
At present your personal allowance (the amount of tax free income) remains the same as the rest of the UK but this may change in the future. The same amount of tax will also be payable on dividends and savings interest, as the rest of the UK, again for the time being.
It is important that the payroll provision of small business owners is able to accept tax codes with an ‘S’ prefix (to denote SRIT) and it will be your responsibility to ensure that if you have your own payroll software, that is compliant with this change.
The table below shows the split between rest of the UK tax and Scottish tax:
|UK rate for England, Wales and Northern Ireland||Income Band||UK rate paid in Scotland||Scottish rate||Total rate paid by Scottish taxpayers|
|Basic rate 20%||£11,001 – £43,000||10%||10%||20%|
|Higher rate 40%||£43,001 – £150,000||30%||10%||40%|
|Additional rate 45%||Over £150,000||35%||10%||45%|
Of course, as the changes announced in the chancellor’s recent budget become reality, firms struggling to survive in the current economic climate may face new challenges but we will look at that separately as the details are fleshed out.
Next up – read our expert’s top tips on how to achieve growth as a sole trader.
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