The Chancellor, Rishi Sunak, has delivered his first Budget since the UK left the European Union. Instead of a Budget that looked to set out the government’s vision for the country on the world stage, it was one that was shaped by the continuing COVID-19 pandemic.
It was a Budget that will have far-reaching implications for businesses and challenges for business owners.
Tax on business owners
The freezing of the higher rate band of income tax at £50,270 until 2026, whilst not a tax increase, is likely to see business owners pay more tax. But prudent use of the whole family’s tax allowances and dividends can reduce that tax burden.
Many business owners will choose to take dividends over a salary or bonus, which are, of course, subject to income tax and National Insurance contributions. Dividends are paid from profits after Corporation Tax and come with a £2,000 tax-free dividend allowance. If the salary drawn from the business is below the rate where an individual becomes a higher rate taxpayer, dividends are taxed at just 7.5%, representing a considerable tax reduction.
Consider, too, using the £12,500 personal allowances of all family members to spread income. This is particularly useful if a partner or spouse has little or no income of their own. Remember, however, that if income exceeds £100,000, personal allowances are clawed back.
But a word of caution – the Chancellor has dividends in his spotlight. The government made changes to the rules in 2016 and further changes are widely expected. It is rumoured that this rate could increase to as much as 45% and that close company dividends may incur National Insurance contributions – and that would have a significant impact on company directors and contractors.
Tax on business
The increase to Corporation Tax from 19% to 25% by 2023 was undoubtedly the headline announcement from this year’s Budget. Businesses with profits below £50,000 will not be affected, continuing to pay corporate tax at the current rate of 19%.
The increase to the headline rate was accompanied by a potentially significant sweetener with the introduction of a ‘super-deduction’ and extending the ability to carry back losses.
Businesses that have been pushed into loss in the tax years 2020/21 and 2021/22 as a result of the COVID pandemic will be able to carry back losses of up to £2m over the next three years rather than just one year under previous rules.
The super-deduction tax relief provides a relief of up to 130% on investments in plant and machinery made over the next two years – the equivalent of a company receiving 25p of tax relief on every pound spent. There is no upper limit on spend making this a potentially valuable relief.
Combined, businesses that have seen losses or that are planning significant investment may see Corporation Tax bills considerably lower in subsequent years.
The Budget covered a lot of ground for businesses and private individuals, and a full Budget analysis can be found on Hillier Hopkins.