Capital allowance changes: Business owners plan ahead!

The Annual Investment Allowance has been fixed at £200,000 for the next five years – a welcome relief to small businesses with high capital expenditure. Business owners can now plan capital expenditure with some degree of certainty, knowing the timing of those payments will no longer affect the amount of capital allowances that can be claimed against taxable profits.

Should I be worried about IR35?

If you provide your personal services to a client through either a limited company or partnership then you may be liable to an IR35 charge. Each contract should be reviewed individually to see whether IR35 applies and this will depend on whether the worker is really independent or an employee.

The basic rule in deciding whether IR35 is applicable is whether an individual would be considered an employee of the client had it not been for the existence of the personal service company or partnership.

If the client pays you by the hour, week, month, etc and tells you what to do, where to do it and how to do the work then you are likely to be considered an employee.

If however you have to provide equipment, tools or materials, can make a loss on the contract, have other people to do the work or have to put right any unsatisfactory work at your own expense then it is unlikely that you will be caught by IR35.

If IR does apply then there will be an additional tax charge will be payable based upon the IR35 “deemed payment”. This “deemed payment” is not paid, it is merely a calculation to assess the additional tax. Below is an example of how this may be calculated.

1 Total of all income and benefits from contracts subject to IR35

Less 5% for unspecified expenses




2 Add any other payments or benefits
3 Deduct any expenses actually paid for by the worker which would have been tax deductible had they been an employee  



4 Deduct capital allowances on any equipment paid for by the worker personally  

5 Deduct any pension scheme contributions (£2,000)
6 Deduct Class 1 or Class 1A national insurance paid by the company on salary and benefits (£867)
7 Deduct any salary or benefits paid by the company that have already been taxed as employment income (£10,000)


8 Multiply by 100 / 113.8 to find




  Employer Class 1 national insurance payable on deemed payment at 13.8%  


Given the potential additional tax liability payable it is important that anyone operating through a personal service company or partnership should have their contracts and working practices externally reviewed to see whether they could be caught by the IR35 legislation.

If you think that this may apply to you, then contact us as we work with Taxwise who can provide impartial contract reviews at a reasonable price.

Is it still worth trading as a limited company?

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.