Birmingham-based Chartered Accountants JW Hinks LLP have said that despite cuts to Corporation Tax smaller firms may find themselves paying out more tax on dividends and in wages.
This is the first Conservative Budget since 1996 and despite rumours that the Chancellor would not cut Corporation Tax lower than its current rate of 20%, George Osborne surprised Parliament by announcing that the rates would fall again to 19% in 2017 and 18% by 2020.
While many larger firms may welcome this news, for smaller businesses there may be trouble on the horizon, as during his speech Mr Osborne also announced reforms to dividend taxes.
Under these reforms, the Dividend Tax Credit will be abolished in April 2016 and a new Dividend Tax Allowance of £5,000 a year will be introduced.
The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. These significant changes to dividend taxation will impact on the overall tax rates for owner-managed businesses, and the effective tax rates on extracting profits.
The Chancellor also announced the introduction of a living wage, which will increase minimum wages for those over the age of 25 to £7.20 by April 2016 – increasing to £9 by 2020. This represents a significant increase in the amount of monthly expenditure made by business and will place additional pressure on firms.
The Budget also held bad news for those with non-domicile status, as from 2017 permanent non-dom tax status will be abolished. This will mean that anyone resident in the UK for more than 15 of the past 20 years will be required to pay tax at UK rates on all worldwide income and gains.
Landlords will also see changes to the tax reliefs they receive on finance costs deducted from profits. Currently they can claim up to 45% tax relief on such costs, including mortgage interest, but the Chancellor has announced that this will be cut to 20% for all individuals by April 2020.
Dan Morgan, Tax Partner at JW Hinks, said: “Many commentators are hailing this Budget as a massive success due to the cuts to Corporation Tax, but many are missing the point that some smaller firms will end up paying more due to changes in how dividends are taxed and an increase in wages.
“I would urge anyone who has concerns about these measures to seek professional help immediately to ensure they get the right advice ahead of the proposed changes.”
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