Changes to the taxation of dividends announced in the recent budget will have a big impact on the tax paid by small business owners.

Currently, anyone trading as a limited company can take their income as dividends, thereby avoiding the 9% national insurance that they would have paid had they been self-employed. The limited company paid 20% corporation tax but there was no additional tax to pay on dividends unless the owner was a higher rate tax payer.

George Osborne has effectively nullified this tax break by announcing that from April 2016 the dividend tax credit will be abolished and there would be new tax rates for dividends.

Small savers are protected as the first £5,000 of dividend income shall be exempt, but anything over that limit will be liable to a 7.5% tax charge. This effectively cancels out most of the 9% national insurance saving.

Assuming that the owner pays themselves a salary equal to the income tax personal allowance, a director with an annual income of £30,000 would pay an additional £1,050 in tax. This rises to £1,800 for someone with an income of £40,000 pa.

The Chancellor did announce that the corporation tax rate would be reduced to 18%, which saves approx 30% of the tax increase. However this is being phased in over a number of years so the effective tax charge will be higher for the next few years.

From April 2016 there will still be a small tax advantage for company shareholders over those that are self-employed but nowhere near the current tax advantage. We would therefore not recommend that anyone already trading as a limited company should disincorporate.

However anyone currently considering incorporating to a limited company needs to assess whether the small tax advantage to be gained from April 2016 is worth the additional compliance costs and potential costs of benefits in kind, etc. There may be other good reasons for trading as a limited company but tax savings are no longer a primary reason.

New pension rules came into effect on 6th April 2015. These give far greater flexibility and options for people with defined contribution pensions who wish to withdraw money from their funds.

The first 25% will be tax free and the person can choose whether to have the 25% tax free element applied to each withdrawal or allocate it to one withdrawal. Other withdrawals will be taxed at the individual’s marginal rate of tax.

There are also changes to annuities so it is important that anyone about to retire seeks impartial advice. A new, Government-backed service, Pension Wise, offers such guidance, which can be given over the telephone using the hotline 030 0330 1001 or face-to-face in a pre-booked appointment. Pension Wise advisers will:

• Inform consumers of the scope, purpose and limitations of the session;
• Request information from the consumer about their accumulated pension pots;
• Request information about the consumer’s financial and personal circumstances;
• Alert consumers to other sources of information and advice;
• Identify options relevant to the consumer;
• Point out tax implications and debt obligations;
• Set out the next steps for consumers to take;
• Provide consumers with a record of their guidance session.

More information about Pension Wise and how to register can be found here. 

Whilst payroll RTI (real time information) was introduced years ago, as of April 2015, penalties of £100 (minimum) can now be charged if returns are filed late or HMRC does not receive the expected number of returns.

Penalties will not be charged for the first month that the Full Payment Submission (FPS) is submitted late, but in subsequent months, a penalty will be levied. For small employers this is £100, but more for larger employers.

Employers with nine or fewer employees can still take advantage of an exemption for 2015/16, provided they remember to use late reporting code E to claim the exemption.

Employers must also be aware that interest will now be charged on late PAYE payments.