EXCLUSIVE

Chancellor George Osborne's budget will cost many contractors £2,000 each.

That's the warning from pharmacy accountant Umesh Modi, who said changes to tax on pharmacy businesses' dividends will leave contractors worse off.

Why changes to dividend tax matter

Dividends are sums of money paid by companies to shareholders: for example, money paid by a pharmacy business to its owner outside of his or her salary.

From next month, shareholders will get £5,000 worth of dividends tax-free.

On any extra money, basic rate taxpayers will pay 7.5%, higher rate taxpayers will pay 32.5%, and additional rate taxpayers will pay 38.1%.

Currently, there is no tax-free allowance, but basic rate taxpayers pay no dividends tax. Higher-rate taxpayers pay 25% and additional-rate taxpayers pay 30.56%.

The changes were first announced in last year's Budget, and confirmed by the government last week (March 16).

Mr Modi, a partner at Silver Levene, warned:

"After taking account of the allowance of £5,000, many contractors will pay an extra £2,000 in tax from next year. The Budget doesn’t go far enough to help small businesses to create jobs and wealth." 

This is despite an increase to the personal allowance: the money anyone can earn without paying income tax.

Currently, the allowance sits at £10,600. It will rise to £11,500 next April, George Osborne announced in the Budget last week.

Dividends can be included in this allowance.

Other budget changes that affect pharmacy businesses

There was some good news for contractors in the Budget, with more relief from business rates for small companies.

Currently, if a business has a rateable value – a number determined by its size, location, and other factors – of more than £6,000 it has to pay business rates.

But from April 2017, this threshold will rise to £12,000, Mr Osborne announced in the budget. This will lift 600,000 companies out of business rates entirely, he claimed.

One contractor told C+D that his pharmacy's rateable value was around £11,500 – so from April 2017 he will pay no business rates.

Click here to estimate your rateable value.

The threshold for paying the higher rate of business rate will also rise, from £18,000 to £51,000. 

This will cut the tax bill of an extra 250,000 businesses, Mr Osborne claimed.

Corporation tax cut

In the Budget, Mr Osborne cut headline rates of corporation tax, paid by limited companies, from 20% to 17%. 

While this "appears to be good", the cut will not come in until 2020, which could be too late for many contractors, Mr Modi warned.

"The cut is needed now", he said.

Pharmacists pointed out that Corporation Tax is only paid on profits, and so the changes will have minimal affect.

@diar_fattah @CandDSamuel Remember cuts are on earnings and corporation tax on profits, therefore staged reduction in CT marginal affect

— Brian Austen (@DiabloRX) March 18, 2016

@diablorx @diar_fattah @canddsamuel If you don’t make a profit you won’t pay corp tax anyway!

— Mike Hewitson (@MikeHewitson1) March 18, 2016