There were many changes in this summer budget, with possibly the biggest impact on firms that operate their practice through a limited company, writes Steve Roberts, tax director at Armstrong Watson, as he spells out how the budget announcements impact on small law firms.

In the first Conservative-only budget for over 18 years the chancellor certainly introduced far greater changes to the tax system than was expected, aligning the stability of the economic growth with creating a higher wage, lower benefit society. The financial statistics were generally good with the Office for Budget Responsibility predicting a surplus from 2019/20.

There was a clear focus on making some major changes to the welfare system including restricting benefits for families with more than two children and bringing sweeping changes to other benefits as well. The idea is, to ensure that everyone is better off in work.

So of the chancellor’s longer-than-usual speech, what announcements will affect firms of solicitors?

For firms that operate through a limited company, the corporation tax rate will be dropping to 19 per cent from April 2017, and 18 per cent by 2020.

When drawing dividends from a company, there is currently no additional tax on dividends paid within the basic rate band, an effective rate of 25 per cent for dividends in the higher tax bracket and 30.6 per cent for those in the additional rate. From April 2016, this will change with the introduction of a £5,000 tax-free rate, a rate of 7.5 per cent on dividends within the basic rate, 32.5 per cent in the higher bracket and 38.1 per cent in the additional rate.

When acquiring another firm, paying for goodwill, corporation tax relief on the purchase of this goodwill will be abolished.

The annual investment allowance, which is the immediate tax offset when buying capital items such as office furniture or IT equipment will be reducing from £500,000 to £200,000 from January 2016. While this sounds like a massive reduction, it was actually due to decrease to £25,000 on that date.

The chancellor announced a national living wage to be brought in so that by 2020, no one over the age of 25 will earn less than £9 per hour - this could see an increase in staff costs.

For those who advise on the private client side, as anticipated, the inheritance tax threshold has effectively been increased to £1m for a married couple with a property worth £350,000 or more. There is however a restriction of this additional IHT free property allowance where the total estate is worth over £2m. There was no mention of the previous budget’s announcement of possible changes to deeds of variation.

To fund the IHT changes there will be a reduction of tax relief on pension contributions for those earning over £150,000. For every £2 earned over £150,000 an individual’s annual allowance will be reduced by £1, so those earning over £210,000 will see their annual allowance reduced to £10,000. It will still be possible to make pension contributions above this level, there just won’t be any tax relief.

For people who own buy to let properties, there will be a restriction on the amount of tax relief available on mortgage interest payments. Relief is currently available at the marginal tax rate, which could be as high as 60% for certain incomes, so a reduction to 20 per cent could make a significant difference. This could see a reduction in buy-to-let conveyancing.

In summary, there were many changes in this Budget, with possibly the biggest impact on firms that operate their practice through a limited company.

Steve Roberts is a tax director at Armstrong Watson and is part of Armstrong Watson’s legal sector team. The legal sector team advises law firms throughout the UK on strategic, structural and other business improvement issues as well as providing efficient accounting, tax and SRA accounts rules services.

The Law Society has exclusively endorsed Armstrong Watson for the provision of accountancy services to law firms.