Yesterday’s budget proved to be for the “makers, doers and savers” with tax cuts for workers, welfare caps and incentives for putting away for the future. I take a look at what these changes mean for you and your business.
Increase in Personal Allaowance
The amount an individual can earn without paying any tax will increase to £10,500 from 6 April 2015 (up from £10,000 for the prior tax year).
This is worth an extra £100 in your pocket (for basic rate tax payers). Directors of limited companies can increase their salaries by £500 a year from 6 April 2015 without paying any additional tax and saving £100 in corporation tax in the process.
Increase in Higher Rate Threshold
£41,865 becomes the magic number when it comes to paying tax at the higher rate of 40%. Income above this level will be taxed at 40%.
This is the first time under the coalition’s tenure that the 40% tax bracket has increased. Combined with the increase in personal allowance, this will increase the money in your pocket if you are a higher rate tax payer. Although the gains are nothing to shout about. Directors of limited companies can take a slightly increased dividend without paying any tax.
Increase in Annual Investment Allowance
The level of AIA has increased from £250,000 to £500,000 to 31 December 2015.
Great news for small businesses as investment in plant and machinery (including vans, computer equipment and other fixtures and fittings) upto the value of £500,000 now qualifies for a 100% write off against taxable profits. For example, if your business has a profit of £30,000 but invests in qualifying plant and machinery of £30,000, taxable profits are reduced to nil. If you’re looking at growing your business, now is a great time to capitalise on this tax incentive.
Class 2 National Insurance Payment Changes
Class 2 National Insurance paid at £2.70 a week by those who are self-employed is usually collected on a monthly or quarterly basis, is now to be taken through self-assessment.
Your January tax bill is likely to increase by around £140 to take into account the lack of contributions during the year. It’s worth putting this money aside each month to ensure you can over it come January.
National Insurance Cuts for Under 21
Employer’s National Insurance will be cut for employees aged under 21.
To encourage youth employment, employer’s contributions have been removed for the majority of under 21s. This reduces the actual cost to your business and will therefore increase your bottom line profit.
Residential Property Purchases
Residential properties purchased through “corporate envelopes” ie limited companies will be liable for stamp duty at a massive rate of 15%.
15% of the cost of the property should will be payable as a one off tax. It is worth reviewing any future purchases and seeing whether purchasing through a company is still the most tax efficient method for you. Alternatively, investing in commercial property is still a viable option.
Increase in ISA Limits
The amount which you can put into an ISA, offering tax free interest on savings, has increased from £11,520 to £15,000.
The level of savings you can shield from the tax man has been increased massively. There is an obvious move to try and give something back to savers who have suffered from low interest rates for the past few years. The change also applies to stock ISAs, so if you have investments, it may be worth looking at a stocks ISA to maximise their tax efficiency.
In a further bid to encourage saving, the pensions system is to be overhauled. Upon retirement, 25% of the pension pot can be withdrawn tax free. Previously, any drawings from the balance was subject to an astounding 55% tax charge. This has been changed, to 20% or 40% depending on the rate of tax you are subject to.
Big tax savings can be made on retirement. Pension contributions still attract tax relief, so saving for your future will continue to lower your tax bill (for both businesses and individuals). You may want to plan the timing of pension withdrawals from your pot to ensure you don’t get hit with a 40% charge.
Overall the budget has achieved its aims. Most workers and business owners will have a little bit extra in their pocket. The increases to the Annual Investment Allowance will help business owners save tax and grow their businesses, in turn boosting the economy. Changes to savings and pensions gives a boost to savers whilst retaining the tax benefits of saving for the future.
If you want to discuss how the budget changes might affect you, or feel now the time is to have a tax review the do please get in touch using the contact details below:
t. 01708 502527
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