Tax rises for small businesses

Last week George Osborne presented his summer budget, which contained a few tax breaks but unfortunately will prove to be a tax increase for most small businesses, especially those operating as Limited Companies.

Tax on dividends

This is the really nasty bit of the budget for small Limited companies. From April 2016 there will be a £5,000 tax free allowance for dividends and then 7.5% tax for basic tax payers followed by 32.5% for higher rate tax payers.

1st £5,000
20% tax band 40% Tax Band 45% Tax Band
 At the moment  0% 0% 25% 30.56%
From April 2016 0% 7.5% 32.5% 38.1%

So if you currently take annual dividends of £20,000 from your limited company, your personal tax will increase from zero to £1,125, which is then doubled because you will have to pay next years tax on account so you would pay £2,250!

Insurance Premium Tax

Insurance premium tax is to be increased from 6% to 9.5% from 1st November 2015. This tax can't be recovered like VAT and so will cost businesses an extra £35 for every £1,000 spent.

Tax CUTs

On the plus side corporation tax is to be cut to 19% in 2017 and then 18% in 2020. 

The employment allowance is to increase from April 2016 to £3,000 per year saving most businesses £138 in employers NI per year.

These 2 savings will not completely offset the tax on dividends, and so it means that all small business owners should be planning to ways to minimise the tax increases from this budget.