George Osborne delivered his first ‘all-Tory Budget’ earlier this week and there were some potentially significant matters that may impact upon doctors, particularly those working in Private Practice. Given the reducing rates of corporation tax and increased rates of dividend tax, many doctors that provide their services via a limited company may choose to review their company’s profit extraction strategy. In particular, the combination of salaries and dividends used to release money into family hands.
Below is a summary of the most pertinent points:
- The Personal Tax Allowance will rise to £11,000 with effect from 06 April 2016. For those with earnings of less than £100,000, the first £11,000 will be received free of income tax. It is expected that the Personal Tax Allowance will increase to £12,500 by 2020.
- With effect from 06 April 2016, the higher rate tax threshold will increase so that an individual does not begin paying 40% tax until their personal earnings reach £43,000. This will further increase to £43,600 from 06 April 2017.
- With effect from 06 April 2016, a new National Living Wage will be introduced which will ensure that all over 25’s are paid a minimum of £7.20 per hour. This may be an issue for those doctors who employ staff within their Private Practice.
- The dividend tax regime will be heavily simplified from 06 April 2015 with all taxpayers being able to receive £5,000 of dividend income entirely tax free. The tax payable on dividends received in excess of £5,000 will be 7.5% for low earners (previously 0%), 32.5% for high earners (previously 25%) and 38.1% for those with personal income in excess of £150,000 per annum (previously 30.5%).
- Whlist the Chancellor did not totally abolish the non-dom status (hinted at by Labour during their election campaign), he did state that, ‘it is not fair that people live in this country for very long periods of their lives benefit from our public services and yet operate under different tax rules from everyone else.’ With effect from April 2017, anyone who has been resident in the United Kingdom for at least 15 of the previous 20 tax years will be required to pay tax in the United Kingdom on their worldwide income. Further clarification on the finer details are expected later this year.
- With effect from April 2016, the wear and tear allowance will be replaced by a new rule that will only allow landlords tax relief on replacement furnishings expenditure. At present a landlord can claim a deduction equal to 10% of the relevant rental amount.
- In addition to the removal of wear and tear allowance, by 2020 all landlords will have their mortgage interest tax relief restricted to 20% compared to 40%/45% currently. This measure is expeted to be phased in between 2016 and 2020.
- Rent a room relief is to increase from £4,250 to £7,500 from April 2016. As a result, an individual will be able to receive up to £7,500 per annum tax free for renting out a room/rooms in their own main residence.
- Currently at 20%, the main rate of corporation tax will reduce to 19% in 2017 and 18% in 2018. Clearly, this will be good news to those providing private medical services via a limited company and may incentivise more doctors to incorporate their businesses.
- Corporation tax relief for the cost of purchased goodwill will be restricted for acquisitions and disposals on or after 8 July 2015.
- Businesses will be able to deduct up to £200,000 of qualifying capital expenditure, per annum, from their taxable profits from January 2016. Whilst qualifying capital expenditure is rare in a Private Practice, there will be ample scope for tax relief on computer equipment and office furnishings.
- From April 2016, doctors who employ staff to work in their business will be entitled to reduce their Employer National Insurance bill by £3,000 per annum (currently £2,000). Regrettably though, companies where the director is the sole employee will no longer be able to claim the employment allowance.
- It is expected that Class 2 National Insurance (payable by sole traders on their Private Practice earnings) will be abolished and the Class 4 National Insurance regime reformed.
- It would seem that the broadly ineffective IR35 legislation will undergo further reform with HM Revenue & Customs being encouraged to work with businesses to improve its effectiveness. There are likely to be developments on this matter over the coming months.
It should be noted that there has also been changes to Tax-free Childcare, EIS/VCT rules and inheritance tax when a family home is included in the estate.
To discuss any of these details further, please call Matt on 01724 700226.