Welcome to our Autumn edition of the Mander Duffill newsletter. As a result of the general election there have been two budgets in 2015. Some of the changes announced come in soon, whilst others do not take effect for a year or more. We therefore thought it would be a good time to highlight the changes which we believe will be important to our clients and that you need to be aware of. We have detailed our top ten tax changes for you to consider, in addition to two important pieces of news regarding the firm.
- Dividend tax
- Changes to the minimum wage
- Tax relief on mortgage interest for property investors
- Corporation tax rate changes and Annual Investment Allowance limits
- Farmers’ averaging to be increased to 5 years
- Employment allowance increase to £3,000
- Travel for contracting companies
- IHT nil rate band increase
- Pensions relief changes
- P11D changes
- Mander Duffill raises £8,000 for children’s charity
- Support for Back On Track and Doorway charities
- Dividend tax
This was a complete surprise to everyone and something of a bombshell. For dividends paid from 6 April 2016 onwards, a new dividend tax will apply to individuals. Each individual will receive a Dividend Tax Allowance of £5,000 each per annum. Dividends above this will then be liable to income tax at 7.5% in the basic rate band, 32.5% if you are in the 40% bracket and 38.1% if you are in the 45% bracket. The additional tax will be payable via your tax return under the self assessment system. We believe that the overall effect for most clients will be minimal once the reduction in corporation tax to 18% has become effective by 2020 (see point 4 below). In the vast majority of cases, we do not believe that these changes alone are significant enough to consider changing the business structure, however we will be talking to clients over the coming months to determine any possible ways to mitigate the effects of the new tax. Some of the areas for discussion may be follows:
- Reviewing spouse/partner’s tax position to determine whether there is scope to include dividend income for them. Each individual receives a £5,000 allowance to use.
- Is it beneficial to pay more dividends prior to 5 April 2016?
- Where a director/shareholder is owed money by his/her company, it may be worth considering paying interest to him/her at commercial rates.
- Where there are assets outside the limited company (e.g. investment property), it may be worth considering transferring these into the company. This could create a directors’ loan account which could then be used to draw income from the company more tax effectively (also see point 3 below regarding changes to mortgage interest).
- There will, of course, be a greater tax incentive to simply leave profits in your company rather than withdrawing them and incurring the additional levels of tax.
- Changes to the minimum wage
Another major surprise in George Osborne’s July budget was the changes he announced to the minimum wage, heralding a new living wage. From April 2016, the new living wage rules will apply to employees aged over 25. Instead of a minimum wage of (currently) £6.50 per hour, they will be entitled to a living wage of £7.20. It is the government’s ambition to increase this amount to 60% of median earnings by 2020, which would put the figure at over £9 based on current earnings levels. From April 2016, the minimum annual salary for someone working 40 hours per week and aged over 25 will be £14,976. By April 2020, the figure should have become £18,720 based on current earnings levels. This will have a significant impact on the cost basis for many businesses.
- Tax relief on mortgage interest for property investors
The other bombshell was the announcement that tax relief for mortgage interest will be restricted from April 2017. The change will be phased in from April 2017 to April 2020. Potentially, the change will increase tax payable for landlords considerably once the transitional period has passed. Interestingly, the change does not apply to properties let through a limited company. One of the things we will therefore be discussing with clients is whether it would be beneficial to transfer property into limited companies, although there are other tax issues to consider.
- Corporation tax changes and Annual Investment Allowance (AIA) limits
The current rate of corporation tax is 20%. This will reduce to 19% from April 2017 and to 18% from April 2020. According to the government, this will result in one of the lowest corporate tax rates in the G20. The current annual limit for expenditure on plant and machinery is £500,000. The Chancellor announced that the limit will reduce from January 2016 to £200,000 and that it will remain at that level for the foreseeable future. For clients with year ends that straddle 31 December 2015, there may be a benefit in ensuring that major plant and machinery investment is made prior to 31 December 2015.
- Farmers’ averaging to be increased to 5 years
In response to lobbying by the NFU, the Chancellor announced that the averaging period for farmers’ profits would be extended from two to five years. A consultation was released on 8 July 2015, setting out the options to be considered. Two main options have been suggested; both options suggest all years of the five would be averaged, but under the second option, averaging would be mandatory for five years once elected for. Following the consultation period, the proposed measures would commence in 2016. Once we have further clarification on the details of the new measures we will be able to look at the effect on farmers’ tax positions and assess the options open to clients.
- Employment allowance increase to £3,000
The employment allowance will increase from £2,000 to £3,000 from April 2016. It is important to ensure that you are claiming this if you are employing staff and, as a result, paying employer’s national insurance. In effect, each employer will obtain relief against the first £3,000 of employer’s national insurance during the tax year 2016/2017.
- Travel for contracting companies
There will be new legislation announced in the March 2016 budget, to be effective from April 2016. It is not yet clear which companies or which travel the new rules will apply to. However, there is a concern that home to site travel in particular may cease to be tax deductible for many IT contracting and consultancy type businesses where a worker is under the supervision, direction or control of the end user.
- IHT nil rate band increase
Included in the Conservative party manifesto was the aspiration to increase the inheritance tax nil rate band. George Osborne duly did this at the first possible opportunity in his July 2015 budget. The current nil rate band of £325,000 per person will be frozen until April 2021. However, an additional ‘residential enhancement’ worth up to a further £175,000 will be available. This additional tax free band will be available when the deceased’s home is left to their direct descendants (broadly children or grandchildren). The new allowance will commence on 6 April 2017 and will increase over the four years to 2020 as follows:
2017/2018 £100,000
2018/2019 £125,000
2019/2020 £150,000
2020/2021 £175,000
- Pensions relief changes
The pension lifetime allowance will reduce from £1.25m to £1m from 6 April 2016. The annual allowance for pension contributions for individuals with income over £150,000 will reduce from £40,000 per annum to £10,000. The income figure of £150,000 includes, amongst other things, any employer pension contributions made. Therefore the reduction in the allowance can in fact start from income levels of £110,000 upwards. For clients where this is relevant, it may well be worth considering making additional contributions prior to 5 April 2016, which we will discuss with you on an individual basis.
- P11D changes
The government is to simplify the reporting of reimbursed expenses. Where the expenses would otherwise be tax free (e.g. the reimbursement of business expenses), there will no longer be a requirement to report them on form P11D. The employer must operate a system for checking that the employee is in fact incurring and paying the expenses and that a deduction would otherwise be available.
- Mander Duffill raises £8,000 for children’s charity
In August this year, two teams of four from Mander Duffill entered the event ‘Race the Sun 2015’ in the Lake District and raised approximately £8,000 for Action Medical Research, a charity devoted to saving and changing the lives of children through medical research. Both teams managed to complete the event within the allowable time… although the two teams’ times were marginally different! We would very much like to thank all of you who supported us and generously donated to the cause.
- Support for Back On Track and Doorway charities
Over the past year, Mander Duffill has raised over £4,000 for Back On Track, helping the charity to provide support for Wiltshire stroke survivors as young as five. Over 120 stroke victims have benefitted from speech and language therapy, counselling and physiotherapy since Back On Track was set up in July 2012. We have collected £4,457 over the last 15 months through ‘dress down’ days, cake sales, raffles – not to mention the rather daring team of seven who put their fear of heights aside and jumped 10,000ft out of a plane at Redlands Airfield in Swindon! The money has gone towards a number of projects, including a cooking course for eight stroke survivors and transport for stroke survivors undertaking work experience placements. We have also helped by providing work experience itself.
Practice manager, Mike Parfitt, said “Our focus is on supporting local charities where we can make more of a difference than just handing over money. We wanted to be able to help Back On Track by offering work experience for some survivors and also try to get involved with events during the year.”
Mander Duffill will be fundraising for Doorway, an open access drop-in centre for the homeless, over the next year.
This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm. Please contact us for further information.