Summer Budget - Family Business

Yesterday, the government committed to maintaining the AIA at £200,000 for the rest of this parliament. This was due to drop to £25,000 from January 2016 so it is good news from this perspective however, AIA currently stands at £500,000 so it is in effect a cut of it’s current value to business owners. Having said that, an AIA of £200,000 is likely to be seen as reasonable, particularly for family businesses, as well as sustainable whereas a cut to £25,000 would have caused widespread criticism.

A transitional amount of the AIA will need to be calculated for accounting periods which straddle 1 January 2016.

For those family businesses who have employees, you should be aware of the Employment Allowance for employers NI contributions, which will increase from £2,000 to £3,000 with effect from April 2016. A new National Living Wage (NLW) in place of the National Minimum Wage (NMW) was also announced, to lift the wages of the lowest paid so that by April 2020 all over 25’s will be earning at least £9 per hour. Whilst this looks like a huge jump from the current NMW for over 21’s of £6.50, the NLW will be phased in from April 2016 with a starting wage of £7.20 per hour for over 25’s. As employers, you should be aware of these changes and we can help with planning for the increase to £9 per hour in 5 years time.  

New measures were announced to come into play from April 2016 changing the way in which dividends are taxed. Currently, dividends are paid net of a notional 10% tax credit and no further tax is due from the recipient, to the extent that the gross dividend falls within their basic rate of tax (which when combined with the personal allowance is currently £42,385). For family businesses, this means that generally the shareholders can extract £42,385 from their companies without paying any further tax.

Family business will certainly feel the impact of these new rules, as they will pay more tax on the dividends they take from their companies. That being said, there are still tax savings to be enjoyed from incorporation and as the new rules do not come into place until April 2016 if any clients are thinking of incorporating, it may be worth doing this sooner rather than later.

From April 2016, the tax credit will be removed and will be replaced by a new Dividend Allowance of £5,000. Dividends received in excess of this £5,000 allowance will be taxed as follows:

          Up to the higher rate threshold (currently £42,385)          7.5%

          Up to the additional rate threshold (currently £150,000)   32.5%

          In excess of the additional rate threshold                          38.1%

Lastly, for those of you looking to purchase other trades, the government is abolishing the tax relief on purchased goodwill so you won’t get tax relief until you sell the trade.

There are plenty of other changes that may or may not affect you, to read more about these have a look at our PDF download here.

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