Of all the changes in the Budget of 8th July 2015 – many of which are the usual tinkering with bands and rates – the one that most affects small company owners, and many Connor Spencer clients, is the proposed change to the treatment of dividends.
The proposals take effect from 6th April 2016 – the start of the 2016/17 tax year.
Those who receive more than £5,000 from company dividends (other than those in tax-efficient plans such as ISAs) will pay more tax. Currently, dividends paid to basic-rate taxpayers are regarded as taxed already so there is no further tax to pay. Under the new rules only the first £5,000 a year of dividend income will remain exempt. For dividend income above that basic-rate taxpayers will pay 7.5%, higher-rate taxpayers will pay 32.5% tax and those who pay the additional rate of 45pc will face 38.1% tax.
The table below compares the current rates with the 2016/17 proposals..
tax rate now
after April 2016 (after £5,000 allowance)
The two main effects of this change, apart from making money for the Treasury, will be:
High income investors will be discouraged from saving.
Those who run owner-managed companies and traditionally take their money out by low salary and higher dividends will now pay more tax to get their money out of their companies. In the long run this will reduce the incentive for people to work through Limited Companies. However, proposed reductions in Corporation Tax will somewhat mitigate this effect
The Treasury commented: "This will reduce the cost to the Exchequer of future 'tax-motivated incorporation’ by £500m a year from 2019-20," but suggested that the tax system "will continue to encourage entrepreneurship and investment, including through lower rates of corporation tax".
HMRC have long been trying to get more tax from owner-managed companies; the introduction of IR35 was a complex and difficult legislation designed for that purpose, but was hard even for HMRC to administer. These new proposals will probably be simpler to police, and produce the extra tax wanted.
HMRC are riding a wave of empathy with people in their pursuit of tax evaders, and even in recent years tax avoiders. But it is time they cleaned up their own dishonesty by not insisting on one law for themselves and one for the rest of us.
Almost every week I, as an accountant acting for many clients, find that I have requested a repayment of over-paid taxes (often improperly demanded by HMRC in the first place) and had to re-request an ignored earlier submission, even doing this three or four times, to get them to part with money that is not theirs toÂ hold onto.
IsÂ it poor administation on the part of HMRC? Or have they, or the Government, decided to hold onto every penny of other people's money until it is wrested from them with great difficulty?
The rules governing who can obtain a home loan are tightening, and mortgage lenders will be forced to apply stricter new guidelines. They will have to conduct a full affordability check on all applicants.
The aim is to prevent the return of the pre-crash crisis in mortgage lending that was described as "reckless".
Before the crash, the housing market was booming, sales were frequent, and lenders were keen to advance individuals a mortgage. In some cases buyers were able to borrow the full price of a home, and a loan on top, then initially just pay back the interest. As values fell many were forced into negative equity, and many struggled to meet repayments.
The regulator, the Financial Conduct Authority, is introducing these new regulations to avert such problems in the future. "In the past too many people got a mortgage by simply telling their lender they would have no problem repaying their debt, and that was that," said Martin Wheatley, chief executive of the FCA. "Our new rules will hardwire common sense into mortgage lending."
But there could be problems. A stricter pre-preparation could mean lenders ask more probing questions about an applicant's lifestyle and delay the process. Part of the process is to test whether or not an applicant could deal with increasing interest rates – something people have not had to deal with for some years.
The lender is required to not only take account of income, but of outgoings too, and could include obvious items such as food and heating bills, holiday costs but are thought to include such as the cost of haircuts, gambling and club subscriptions, travel costs and childcare.
Borrowers will be expected to declare potential changes too; perhaps being asked if they intend to have children in the near future, for example.
It is hard to keep up with Government Steath taxing. I've only just published a newsflash on this website front page about a hard-hitting change for pensioners and now its time to warn those selling houses that may be subject to Capital Gains of a new restriction to tax saving if they sell their property after 6th April 2014. If you lived in, as principle residence, a house that was then let out (often happens when couples meet and one moves into the other's house and lets out their former home) then the last three years of ownership were counted as part of the excepted part of the gain. For sales made after 6th April 2014 that is now restricted to 18 months only, bringing more of the gain into tax.