George Osborne presented his first proper Tory Budget on July 8 and, while it left many things unchanged from the earlier March version, there were some announcements that did take commentators particularly various employers’ and business organisations by surprise. Probably the biggest of these surprises, and one that naturally hasn’t gone down very well with employers, was the announcement of the National Living Wage (NLW). The pre-July Budget scenario was that there were increases to the National Minimum Wage (NMW) due to come into effect from October 1, with the resulting rates becoming:
Age 21 and over£6.70/hour
However, the Chancellor then announced the new NLW rate of £7.25/hour, which will be compulsory for all workers aged 25 and over with effect from April 2016. The already-announced NMW increases still come into effect in just a couple of months’ time, so the NLW effectively creates a fourth age category with its own rate just six months later.
To further increase the discomfort of many employers, Osborne also indicated the government’s intention to have the NLW increase in stages to £9/hour by 2020.
Taken alone, these figures may not be all that huge. However, as we mentioned last month, most employers are already facing the introduction of Auto Enrolment for employee pensions between now and early 2017. Part of that process will require employers to make contributions into their employee schemes rising from 1% through to 3% over the next couple of years. It’s clear then that many employers could be facing increases in employment costs between now and 2020 and that’s before taking into account any general inflation factors that could come into play.
The only piece of good news in the July Budget for many employers was that the Employment Allowance (against Employer’s Class 1 National Insurance contributions) is to increase from the present £2,000 a year to £3,000 from April 2016 per PAYE scheme.
Good news/bad news
For those trading within a limited company set up, there was another mixture of good and bad news. Starting with the two pieces of good news, the main rate of Corporation Tax will drop from 20% to 19% in April 2017 and then to 18% from April 2020. If you’re planning on making significant investment in plant or equipment in the coming years, then you may welcome the announcement that the Annual Investment Allowance has been fixed at £200,000 from January 1, 2016 (it had been due to revert to £25,000). This allowance allows the cost of qualifying asset purchases up to that amount to be written off against taxable profits in the year of purchase, rather than spread them over several years.
However, for owners of many smaller businesses running as limited companies there was distinctly unwelcome news in respect of the taxation of dividend income. For quite a few years, the most tax efficient way for shareholder/directors of small- and medium-size businesses to pay themselves has been by taking a minimal salary and declaring a dividend to themselves say twice a year to give them their full annual remuneration. Not only did this avoid their company having to pay National Insurance contributions on a large part of their remuneration, but because of the way in which dividend income was taxed, it could result in an effective tax rate of just 10% on the dividend income.
In his July Budget, the Chancellor moved to reduce the attraction of this method. Under the new rules, each taxpayer will be given a personal allowance of £5,000 of dividend income tax free. Beyond this, all dividend income will be taxed: for basic-rate taxpayers the rate will be 7.5%; for those in the 40% tax-rate band the rate will be 32.5%; and for those in the 45% tax-rate band the rate will be 38.1%. So at a stroke much of the existing tax-planning done for owner/operators of smaller businesses using dividends from their own businesses as their main source of income will need to be reviewed. That’s not to say that automatically the dividend-remuneration method becomes useless individual circumstances may still prove it to be most tax-efficient. However at this stage it looks as if the days are over of recommending it as standard advice to those setting up their own companies. And in case you haven’t noticed, many new retailers taking commission-operated forecourts are expected or required to set up limited companies through which they trade, and the dividend remuneration route has been one common way of keeping down their personal tax bills!
Continuing on the personal tax side, we now know what the personal allowances will be for the next few years. Currently (ie 2015/16 tax year), the allowance (for those born after April 6, 1938) is £10,600, with the income limit for the allowance being £100,000 per year. The allowances for 2016/17 have been announced as £11,000 and for 2017/18 as £11,200 with the corresponding basic rate tax limits as £32,000 and £32,400 respectively.
These are just a few of the changes announced in July, although for many small/medium businesses the two most far-reaching ones are likely to be the NLW and dividend ones. The particular combination of Auto Enrolment and Living and/or Minimum Wage increases will affect virtually every employer. How they choose to react remains to be seen, but already some commentators are suggesting that smaller employers may in future deliberately try to maintain a ’rolling workforce’. One that’s permanently below 25 years old on the basis that such workers are going to be on lower wages and are less likely to be interested in contributing into any pension scheme. Only time will tell.