George Osbourne’s budget last week (Wed 8th July 2015) left a very sour taste in mouths of owner-managed businesses that trade through a LTD company. One of the main reasons for small businesses to trade through a limited company was the avoidance of national insurance (@ 9% of profits) paid by those that work for themselves through a sole tradership or partnership. For a small business only making a modest profit of £30k, the tax saving was over £3k (10% of the turnover) compared to trading as a sole trader, more where profits are higher obviously. It was a “no-brainer” to incorporate, and has been like that for many decades, something business people thought they could rely on as being unchanged.
The extra dividend tax at 7.5% (at basic rate tax, higher for higher rate and additional rate tax payers) that takes effect from April 2016, means that the saving of NI is now cancelled out by this extra dividend tax. This will put a large strain on the financial resources of business owners that may have made financial commitments (eg: they have a mortgage) based on their take home pay being taxed as it has always been in living memory, with no additional taxes. Such business owners may now struggle to meet their financial commitments.
Also, lots of businesses that were thinking of incorporating will now not do so. In fact, AccounTax had just incorporated a company in the local Guildford area only a few weeks ago, and now we are trying to help that business go back to being a sole trader. Why go back to being a sole trader? Life is so much simple and the accountancy fees are lower for starters. The incentive to incorporate to save money (ie: taxes) has now all but dried up.
So much for the government’s promise before the election just a few months ago that they wouldn’t raise Income tax.