It is important to establish that we have no “political axe to grind” here. We simply wanted to set out an impartial summary of the manifesto pledges of the two main political parties with a little bit more digging into the possible implications for individuals and businesses.
Summary of Conservative Party’s Manifesto’s Tax Pledges:
There really isn’t too much in this. Chancellor Sajid Javid has announced a February budget that will cut taxes focussing on those working families that need help the most. There are no further details. Separately he has also announced a review of IR35.
From the manifesto:
- Promised to freeze income tax, NIC and VAT rates – This is their “triple lock”. It is worth mentioning here that whilst in place the triple lock did not stop changes to dividend tax and landlords in George Osborne’s 2015 budget.
- Proposed reduction of CT to 17% has been reversed and it will remain at 19%
- Increase of the NIC Primary Threshold to £9,500 from £8,632 with ultimate aim to bring equal to PA of £12,500. Good news for all employees saving them about £100 initially and rising to £460+ in time. This should apply to company directors on minimal salaries as well.
- Increase current Employers’ NIC Allowance from £3,000 to £4,000.
- SEIS and EIS schemes will continue, although they aim to review and reform Entrepreneurs’ Relief – if you are planning a sale you might want to keep a careful eye on this.
- R and D tax credits increased to 13% from 12%.
- No changes to IHT or pension taxes.
- Plan to impose 3% SDLT surcharge for non-residents who buy UK property.
- An increase to the National Living Wage forecasted at £10.50 an hour for workers 21 and over.
Summary of Labour Party’s Manifesto Tax Pledges:
Shadow Chancellor John McDonnell has not confirmed the timing of his budget but has stated the changes would be “Day 1” if Labour gain power. Although that is possible/practical with some it is worth saying that tax rates are rarely changed other than at the next 5th April for income. Capital changes such as Entrepreneur’s Relief have been known to change with immediate effect on the date of a budget.
- The manifesto states “We’ll ask those who earn more than £80,000 a year to pay a little more income tax, while freezing National Insurance and income tax rates for everyone else.”.
- At present income over £150k is taxed at 45%. This threshold will be lowered to £80,000. Those earning over £125k will have a new rate of 50%. The impact of the 45% rate means those earning between £100,000 and £125,000 will have an increased effective tax rate of 67.5% on income in this band (from currently 60%)
- Removal of Married Couples Allowance worth between £345 and £891.50 per annum
- Aim to increase Corporation Tax to 26% for companies whose profit exceeds £300,000. This would start from 6 April 2020 when a 21% rate would be implemented and increase gradually to an eventual rate of 26%. Small companies will see an increase to 21%.
- A full review of all corporate tax reliefs including R&D tax credits. The review will examine the body of corporate tax reliefs for its effectiveness against their stated aims and compared with alternative policy measures to achieve these aims.
- There are also pledges to force “large” companies to allocate 10% of their shares to workers via an Inclusive Ownership Fund.
- Abolish Entrepreneurs’ Relief plus the Annual Exemption for CGT (above ade minimus limit of £1,000). CGT will be taxed at the same level of income tax (up to the new rate of 50%).
- A new lifetime giving tax to replace IHT, effective at income tax rates for transfers of assets worth over £125,000.
- Increase minimum wage to £10 per hour for workers of 16 and above.
- Increase tax rates on dividend income to match income tax rates.
A significant number of OMB owners take their money out of a company via a small salary plus dividends. Therefore, it is worth exploring the proposed dividend tax changes in a little more detail.
The amount available for a company owner to take as personal income will reduce as the company will have to pay slightly more corporation tax (between 2% and 7% increase depending on the level of profits). For the majority of companies that have profits under £300,000 a 2% increase in CT is not too dramatic.
The big change is on the personal tax you will pay on the dividends received.
We have run illustrations of the impact of the changes in a number of scenarios. Pages of figures don’t make got a scintillating read but if you’d like a breakdown please just get in touch. These are based on a company with profits of less than £300,000.
A company owner that takes £40,000 gross via a low salary and dividends will see an increase in their personal income tax of £3,878 on that income.
A company owner that takes £80,000 gross via a low salary and dividends will see an increase in their personal income tax of £7,378 on that income.
A company owner that takes £130,000 gross via a low salary and dividends will see an increase in their personal income tax of £15,775 on that income.
As one would expect the tax policies stated in manifestos are markedly different.
As tax advisers, we need to await the result in a week’s time and take stock then. Tax positions can be reviewed and there may be a short window in which to take any appropriate action before any changes are implemented.
If you are planning an imminent sale, which you are hoping to be taxed at current capital gains tax rates or using existing reliefs, you might want to give us a call