Did you know that there are 3 big new costs for entrepreneurs in 2016 that mean you might have to increase your sales by as much as 10% just to make the same cash as in 2015?
And that many businesses don’t even know about them?
They’re all as a result of government policies that hit small businesses this year. So, what are they? Watch our video, or read about them below.
1. Change to dividend tax
Most business owners pay themselves a small wage to use up their personal allowance, and then use dividends to take money from the business.
This is really tax-efficient as there’s no tax on dividends on earnings up to £42,385. It’s one of the main advantages in having a Limited Company.
However, the tax on dividends changes on 1 April 2016. From then, you’ll get £5,000 of dividends tax-free but, after that, there’s a tax of 7.5%. And there’s also an extra 7.5% of tax on dividends in the higher tax bands.
As an example, if you pay a small salary and have a £25,000 dividend in 2015/16, there’s no tax. In 2016/17, there’ll be tax of £1,500 on the same dividend. I don’t need my calculator to work out that’s an extra £1,500 of tax!
2. Living Wage
From 1 April 2016, there’ll be a new Living Wage for workers aged over 25. The rate will be £7.20 per hour, replacing the current Minimum Wage of £6.70 – that’s an increase of 7.5%.
I was chatting to one of my clients, a restaurant owner, recently and this impacts half of their staff. On top of that, it means that the current wages of the other staff will have to be increased as it means that some of the wage rates are now out of sync with the experience of the staff.
As an example, if you have a 24-year old who’s been with you for years and is paid £7.10, while a 25-year old who’s new to the business is paid £6.70, can you keep the 24-year old on £7.10 when the 25-year old gets a pay rise?
3. Workplace Pensions
Autoenrolment, or Workplace Pensions, was announced a few years ago but 2016 is the year when it finally hits many small businesses.
By now, you’ll have probably seen the TV adverts with the fluffy multi-coloured monster who everyone ignores. This is because many people have ignored Workplace Pensions for the past few years. But this year you’re really going to have to take notice. And, by 1 August 2017, all current employers must have entered the scheme…..or face heavy fines.
(In October 2014, The Pensions Regulator applied the first fines – three firms were each fined £400 for non-compliance by their deadlines of 31 August. These fixed penalty notices are just the first step – daily penalties can then be charged and these can vary from £50 to £10,000 per day!)
So, what’s the cost of a Workplace Pension?
Well, there’s a lot of admin upfront and then more admin to run it but, at a pure cash level, you could be paying 1% of staff wages into a pension in Year 1, rising to 2% in Year 2 and 3% in Year 3.
We’ve been banging on about this for a few years and ran a seminar last Spring, but it’s now speeding up. In 2016, there will be over 500,000 businesses starting Workplace Pensions compared to 75,000 in the last two years! Therefore, it’s worth getting it sorted as the experts will be overrun as demand increases.
How does it all add up?
So, there’s a 7.5% increase in dividend tax, 7.5% added on to some staff costs, plus 1% to a pension and a cost to setting it up. What does this all mean to you?
Well, it will depend on your exact details but we’ve run a few examples and the net effect is a drop in take-home cash of more than 10%, which means that you’ll have to increase sales by 5%-10% just to make the same cash as last year!
What can you do now?
Well, Step 1 is to look at your figures and understand the impact on your business. And then put a plan together to increase sales or look at other cost or tax-saving areas.
If you’d like any help, please get in touch.
If you found this useful, please share it using the icons at the top and bottom of the page, or leave a comment below.
Added by Jon Davies
If you like it, please share it!