Headline news from the Chancellors Budget all seem to relate to the impact on small businesses, particularly the self-employed, although small Companies utilising dividends as a form of remuneration are also affected.
For the self-employed, partnerships the current rate of Class 4 national insurance contributions will increase from 9% to 10% from April 2018 and then a further increase to 11% from April 2019.
The only consolation is the abolition of the Class 2 national insurance stamp, currently £2.80 per week, from April 2018.
Although the rate of corporation tax is reducing for small Companies to 19% there was a significant announcement in the reduction of the dividend allowance.
Readers will recall that as from April 2016 there is a new dividend tax of 7.5% payable on dividends in excess of £5K per year. This firstly affects the small owner managed Company where remuneration is taken in the form of dividends as well as salary. The rate of dividends free of tax has been reduced from £5K to £2K with effect from April 2018.
Both these two significant announcements the increase in the Class 4 rate and the reduction in the dividend allowance will have an adverse effect on small businesses with higher taxation payable for the year 2018/19 and beyond.
The reduction of dividend allowance will also effect those who rely on investment income to supplement their income in retirement with higher tax payable from April 2018.
Landlords will be able to use a cash basis of accounting from April 2017 declaring rental income rather than the accruals basis. Landlords with more than one property business will be able to choose the cash basis or what is known as GAAP for each of their property businesses.
The cash basis of accounting would also apply to small self-employed sole traders, partnerships from April 2017, threshold increasing to £150K per annum.
It should be remembered that the cash basis will not be suitable to a tax payer for the more complex business where financial accounts have to be given to a Bank for review and where there are losses involved.
A reminder that there are complex rules for allowing the deduction of financial costs, interest on mortgages in the letting of residential properties from April 2017. This does not affect Companies renting out property nor does it affect the letting of commercial property or furnished holiday lettings.
VAT flat rate scheme – do not forget the changes to the VAT flat rate scheme from April 2017. There is what is called now the Concept of a Limited Cost Business. If your business spends on ‘relevant goods’ including VAT, either less than 2% of your VAT flat rate turnover or is greater than 2% of your VAT flat rate turnover but less than £1K per year then you have to apply a percentage of 16.5% when using the flat rate scheme.