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Following on from our ‘2013 Budget Update’ note issued last month (copy available on request), we’ve now taken some time to consider what the changes could really mean for businesses…with a penny off the price of a pint just remember to take the beer goggles off before making any vital decisions!!
We’ve also attached a handy copy of our tax rates card for 2013/14, which we hope you’ll find helpful.
For many owner managed companies the age old question of whether to take dividends or bonuses continues to be a good one. In recent years, the answer in the majority of cases is that dividends have been the more tax efficient method of extracting profits from the business and for most this will continue to be the case. However, the new £2,000 employer's national insurance allowance and the increased income tax personal allowance (£10k from April 2014) could change things.
Where there are no other employees, so the full £2,000 employer saving is attributable to the salary received by the director, from April 2014, the director could potentially take a gross salary/bonus of up to £23,000 before dividends start to become more tax efficient. The position will obviously depend on the individual circumstances of each company and shareholder.
From April 2014 employers will be able to provide employees with loans of up to £10,000 interest free without any benefit in kind taxes arising. However, if the loan is provided by a corporate employer to an employee who is also a shareholder in the company, tax liabilities can still arise on the company (commonly known as Section 455 tax). Care is therefore still required.
It is worth noting that the rules on Section 455 tax are also being tightened, particularly with regard to:
It is worth remembering that, from 1 January 2013, the annual investment allowance was raised to £250,000 per annum for a period of 2 years. There are however some complex rules regarding how this is to be apportioned for businesses that do not have 31 December year ends. As corporation tax rates are decreasing it also makes sense to ensure relief is claimed in earlier periods. If you are intending to invest in new computers, machinery or other qualifying assets over the next few years, you may therefore wish to consider the timing of such expenditure to ensure the most tax efficient result is achieved.
The emissions threshold for capital allowances on cars is reducing to 130g/km. Cars with carbon dioxide emissions above this will only qualify for capital allowances at 8% per annum (cars below this get 18%, as do all vans). Although cars with ultra low emissions can still claim 100% first year allowances.
For employees, the benefit in kind charges for private use are also increasing, even cars with emissions of under 50g/km will be taxed at 5% from 2015.
Although the good news is that fuel duty isn’t rising by as much as had previously been indicated!
It may now be time to take the cars out of the business and start claiming a tax free allowance (at HMRC approved rates) for business mileage instead.
A cap is being placed on social care costs and the flat rate (£144 a week) state pension is being brought forward to 2016. The more cynical amongst us may also have a suspicion that the state pension may disappear altogether in the future. It is therefore more important than ever for individuals to ensure they have made sufficient arrangements for their ‘golden years’.
Employer pension contributions continue to be a tax efficient method of remunerating employees and it is therefore worth considering remunerating employees through employer pension schemes (possibly in conjunction with a salary sacrifice scheme, which can bring further tax savings).
A less publicised new tax relief that has been introduced is Disincorporation Relief, which has been introduced for a limited time only – 5 years from April 2013.
Generally, where a business has profits of more than around £50,000 it can be more tax efficient to operate the business through a company rather than as a self employed sole trader or partnership. Tax reliefs have been available for those moving from self employment to a company for many years. However, until now, moving from a company to a self employment could give rise to substantial tax liabilities.
Increasing administrative burdens on companies – including the need to file accounts and tax computations to HMRC in “ixbrl” electronic format – the costs and hassle of running a company, together with the long running economic downturn, have meant that many companies have seen their profit margins decreasing. Many small businesses may therefore now benefit from disincorporation.
Disincorporation does however mean that the business will lose the “limited liability” that companies benefit from. The best structure for your business will depend on a number of factors and full advice should be sought before any decision is made.
Enterprise Management Incentive (EMI) Schemes
Generally, in order to qualify for Entrepreneurs’ Relief on capital gains tax on the sale of shares, the individual must (amongst other things) have held the shares for a period of 12 months, those shares representing more than 5% of the company’s share capital. The 5% condition had been removed previously for shares acquired under qualifying EMI options, but the 12-month holding period remained, meaning that in cases where the options were exercised shortly before a sale of the company Entrepreneur’s Relief would not be available even if the 5% test were met. The rules have been further amended so that the period of holding the option may be taken into account in looking at the 12-month ownership test. This should allow many employees exercising their options in advance of a company sale to benefit from the 10% capital gains tax rate (rather than a charge of up to 28%).
For more information regarding the Budget changes and what you could be doing to make the most of these, please contact firstname.lastname@example.org