Following Labour’s victory in the General Election, Rachel Reeves became the first female Chancellor to deliver a Budget on 30 October 2024. It is the second Budget of 2024 (after Jeremy Hunt’s Budget on 6 March 2024) and was a tax raising Budget. The following is a summary of the main points which affect small businesses (our client base).
Employers National Insurance
The biggest change, and one which will impact many small and medium sized businesses, are to Employers National Insurance (NI).
Firstly, the rate at which Employers NI is charged is going up from 13.8% to 15%.
Secondly, the threshold at which it is charged is dropping from £9,100 to £5,000.
Thirdly, the Employment Allowance (which is a credit to reduce the impact of Employers NI) is increasing from £5,000 to £10,500, which should shelter many smaller employers from the effects of the increase.
All of these changes are effective from 6 April 2025.
Capital Gains Tax
There are currently two sets of Capital Gains Tax (CGT) rates. The CGT rates on residential property are 18% (standard rate taxpayers) and 24% (higher rate taxpayers), whilst the corresponding rates for all other gains are 10% and 20%. These have now been aligned and the new CGT rates for ALL gains are 18% and 24%. This harmonisation is immediately applicable.
In respect of reliefs, the 10% rate for both business asset disposal relief (BADR) and investors’ relief (IR) remains for the rest of this tax year, but will increase to 14% from 6 April 2025 and then to 18% from 6 April 2026.
Stamp Duty Land Tax
There is currently a higher rate of Stamp Duty on the purchase of an additional residential property by an individual of 3%. This will increase from to 5% for transactions with an effective date, usually completion, on or after 31 October 2024. This will also apply to the purchase of a residential property by a company.
Income Tax Thresholds
The current Basic Rate, Higher Rate and Additional rate thresholds for income tax have remained the same since 2021. However, the freeze will be lifted in April 2028 when the thresholds will begin to rise in line with inflation.
Inheritance Tax on Pensions
Personal pension pots are considered outside of the estate for Inheritance Tax (IHT) purposes. This exemption will effectively be abolished with effect from 6 April 2027.
High Income Child Benefit Charge
The thresholds for paying the High Income Child Benefit Charge (HICBC) were increased in the March 2024 Budget; Child Benefit becomes repayable once earnings reach £60,000 and the upper limit will be £80,000. At the time, it was also announced that there would be a radical reform of the mechanism of the HICBC by “moving to a system based on household rather than individual incomes”. However, the Budget confirmed that the Government will not proceed with the reform to base the HICBC on household incomes. Instead, there will be an update to the mechanisms by which the HICBC is collected; employed individuals will be given the opportunity to pay the HICBC through their tax code and the self assessment tax return will be pre-populated with child benefit data.
Double Cab Pickups
The tax treatment of cars and vans differ significantly, for VAT, capital allowances, and benefits-in-kind (BIK) purposes. Following a successful court case for HMRC, the Government announced that it will classify double cab pickups as company cars. This change comes into effect from 1 April 2025 for corporation tax and 6 April 2025 for income tax; existing capital allowances treatment will apply to those who purchase double-cab pickups before April 2025. Also, the transitional BIK arrangements will apply for employers that have purchased, leased or ordered a double-cab pickup before 6 April 2025. In this case, they will be able to use the previous treatment, until the earlier of disposal, lease expiry, or 5 April 2029.
NB HMRC tried to make this exact change in February 2024, only for it to be reversed shortly afterwards.
Further information is available here.
N. Goddard
4.11.24
As mentioned in a previous blog, and trailed in the media for the last couple of years, the rate of corporation tax has changed from 1st April 2023.
For the last few years, corporation tax for small companies has been relatively simple, there has been a single rate of corporation tax, which was 19%.
From 1st April 2023, there are effectively three rates of corporation tax:
(*) the tax rate for this band is actually 25%, but is reduced using a marginal relief calculation, which gives the effective tax rate of 26.5%.
This means that if your taxable company profits are less than £50,000, the company should still pay 19% corporation tax.
This has a particular relevance for small owner managed businesses. For the last few years, there has been little difference between income tax paid by individuals (20%) and corporation tax paid by limited companies (19%). The change now creates a clear difference, but the relationship between company and personal tax is contingent upon:
It also may influence company pension payments for the director(s), as tax relief could be higher than normal (25% and/or 26.5%, rather than 19%).
Associated Companies
A further complication arises where two or more companies are owned by the same people. Associated Companies for Corporation Tax rules have been reintroduced, applying from 1st April 2023.
The upper and lower limits for taxable profits (£50,000 & £250,000) are reduced depending on the number of associated companies, the taxable profit limits being divided equally among all the associated companies.
This means that if there are 2 associated companies they will pay 25% on profits of £125,000 and above (being half of the rate of £250,000), and will move out of the 19% rate once the profits reach £25,000 each rather than £50,000.
This highlights the importance of examining the relationship between companies in which you own shares, and the likely profit levels in each.
What is an associated Company?
Broadly a company is associated with another company if at any time within the preceding 12 months:
Please note that dormant companies are exempt from this test.
Meaning of ‘control’
A person is treated as having ‘control’ if they can exercise control over the company. This normally comes with owning more than 50% of the share capital.
In certain circumstances the rights and ownership of other people can be attributed to you and combined with your shareholding. This is most common with spouses or partners but can also include children or siblings.
For example, if you own 35% of the shares in a company and your spouse owns 20% these shareholdings are added together; as you jointly own 55%, you are judged as having control.
In addition, where there is “substantial commercial interdependence” between two companies, we also need to take into account the rights and powers of each shareholder’s “associates” when looking at whether the companies are under common control. Associates for these purposes include relatives (spouses/civil partners, parents, grandparents, children, grandchildren, siblings and so on), partners, and some trustees and settlors.
The rights of an individual’s associates only need to be considered if there is substantial commercial interdependence between the companies. For example, if a husband and wife each have 100% control of their own companies, those companies will not be associated unless there is substantial commercial interdependence between them.
Substantial commercial interdependence
There are three types of commercial interdependence:
Just one of the above is enough for substantial commercial interdependence to exist. For example, if a company lends to another that may be enough to constitute substantial commercial interdependence even if there is no other link between them.
Further technical information from HMRC can be found here.
On 23rd September 2022 Kwasi Kwarteng, the new Chancellor, delivered a ‘mini’ Budget with some quite significant changes to the tax system. There have been a lot of changes in respect of tax increases announced by the previous Chancellor (& Prime Minister). The following is a summary of the changes which impact small business.
As was announced the previous day, the 1.25% increase in National Insurance (NI) will be reversed from 6 November 2022. Also, the Health and Social Care Levy was going to be introduced from 6 April 2023, but this will now not happen.
The increase in dividend tax rate followed the increase in NI, but the drop back to previous rates won’t take place until 6 April 2023. Therefore, the dividend tax rate for normal rate taxpayers for 2022/23 will be 8.75% and 33.75% for higher rate taxpayers.
The basic rate of tax is 20% and this was due to drop to 19% from 2024. However, this reduction has been accelerated by a year, and will take place from 6 April 2023.
The drop in the rate of income tax will have a detrimental effect on charities, as donations will attract a lower amount of Gift Aid. In order to support charities, the reduction will be phased in over 4 years.
The additional rate band of income tax, payable on income over £150,000 (at a rate of 45%), will be abolished from 6 April 2023.
From April 2023, the main rate of corporation tax was due to increase to 25%. This has now been scrapped.
Currently, tax relief of 100% under the Annual Investment Allowance is available in respect of the first £1m of capital expenditure, and this level was due to drop to £200k from 1 April 2023. However, the £1m limit has been made permanent.
The changes announced over the last 5 years to IR35 in respect of the public sector (2017) and the private sector (2021) will be repealed from April 2023.
Further details on the Mini Budget can be found here.
GBM Accounts
26.9.22
The dividend tax was introduced in April 2016 and the first tax year it related to was 2016/17 (year to 5 April 2017). We have now gone through the cycle a couple of times. It is currently 7.5% if you are a basic rate taxpayer, 32.5% if you are a higher rate taxpayer, and 38.1% if you are an additional rate taxpayer.
In respect of the dividend tax, everyone has a dividend allowance, which relates to dividend income they can receive before having to pay dividend tax. For 2016/17 and 2017/18, this was £5,000 p/a. It was reduced from 6 April 2018 to £2,000 p/a. The allowance is a ‘use it or lose it’ allowance. As it has been reduced, we have been working hard to make sure that clients have used it!
As with all taxes, there have been consequences (unintended or otherwise) of the dividend tax. The following are some of the more common ones we have come across.
There will undoubtedly be other consequences of the dividend tax, but these are some of the more common ones. If you need any help navigating the effects of this, please don’t hesitate to get in touch.
If you don’t believe that HMRC make mistakes, read this!
We act as agents with our client’s dealings with HM Revenue and Customs (HMRC) and sometimes they get it wrong. A recent incident has highlighted how easy this can be.
We had finished a VAT return for a client, ABC Contracting Limited (*), and went to submit it to HMRC. However, HMRC’s records showed that the business had actually deregistered from VAT, and that the return that was outstanding was the last one. We had no knowledge of this, and contacted our client, who also didn’t know anything about it. So we contacted HMRC.
They said that the VAT registration had been cancelled and that our client was in liquidation. Again, a revelation! They gave us the date of liquidation and the liquidator’s name. After 5 minutes searching on Companies House, we found what the problem was. The company which was in liquidation was ABC Contractors Limited, not ABC Contracting Limited. It was a different company. So our client is not deregistering from VAT, nor in liquidation. Phew!
This does, however, highlight how easy it is for HMRC to make a mistake.
They had presumably received a paper form which they processed.
The company had a similar name to our clients, but presumably a different company number and VAT registration number.
They had got the name wrong. This had the effect of making the VAT records for 2 businesses wrong.
It does also bring into question how much care HMRC take when processing documents.
We have observed over the years that people are often inclined to believe HMRC. They are a large organisation with procedures and controls which presumably are there to reduce mistakes. We feel that HMRC pursue taxpayers who don’t engage accountants for this very reason, that they are more likely to believe HMRC and possibly pay tax which isn't due.
The conclusion is that nobody’s perfect. HMRC have proved that they can, and do, make mistakes. And if appropriate, you can make a complaint.
(*) company names have been changed.
April is traditionally a time for change, as it signals the end of one tax year and the start of the next. We have identified 8 changes in April this year which may affect small business owners.
The personal allowance for the 2018/19 tax year is increasing to £11,850.
The marriage allowance is 10% of the personal allowance, therefore an increase in the personal allowance automatically translates to an increase in the marriage allowance. This is going up to £1,185.
The point at which taxpayers start to pay 40% tax is increasing from £45,000 to £46,350. This is especially good news for directors who can increase dividends declared. The tax on dividends for standard rate taxpayers is 7.5%. For higher rate taxpayers, it jumps up to 32.5%.
As highlighted in our recent blog, the National Living Wage (NLW) is increasing from the beginning of April.
Again this was covered by a recent blog. The rate at which employers and employees pay into a workplace pension increases from 6 April.
Directors tend to be paid a tax efficient salary which is driven by the lower earnings limit for National Insurance. As this limit is increasing, then the tax efficient amount can also increase. Please sit down, the numbers are mind blowing. For the 2018/19 tax year, the most efficient amount which directors can pay themselves increases from £680 p/m to £702 p/m. NB directors salary should be viewed as part of a remuneration package and there may be other factors which affect the level of salary taken.
From 6 April 2016, shareholders in limited companies have had a dividend allowance and paid dividend tax. The allowance for 2016/17 and 2017/18 has been £5,000. Any dividend income over this allowance is taxed at 7.5%. For the 2018/19 tax year, the dividend allowance is reducing to £2,000
In April 2017 the government started the slow eradication of mortgage interest relief for landlords. Under the old system landlords would pay income tax on their profits after mortgage interest had been deducted.
This is now being phased out. Last year you could only claim 75% of your mortgage tax relief, but this will fall to 50% from April this year. This means that you can only deduct 50% of any mortgage interest you have paid on buy-to-let properties from your profits when you are calculating how much income tax you owe. You will receive a 20% tax credit on the other 50% of your mortgage interest.
Again this has been covered here.
So there are the changes in April 2018. You may be affected by some of the changes, or all of the changes. The variety highlights how tax continues to get more complex, and the importance of getting advice in respect of your tax affairs, particularly if you have a business. If you need help with this, please don’t hesitate to get in touch.
