Did the Summer Budget mark the end of the small incorporated business?
July 11, 2015 | By Nimbus |
Those businesses that are run through a limited company structure had the advantage of avoiding National Insurance, by structuring the extraction of funds using a low salary and extracting additional funds as dividends. The chancellor announced that from April 2016 dividends for basic rate tax payers would increase from an (effective) 0% to 7.5%. He also announced that the old notional tax credit of 10% would be abolished. So while the rates of taxation for higher rate and additional rate payers are nearly identical at 32.5% and 37.5%, once the tax credit is taken into account the 7.5% is seen to be levied across the spectrum.
The rationale behind this change is to close the tax gap between operating under the corporate structure and the self employed sole trader. Thankfully there is also a new £5,000 tax free dividend allowance for all tax payers, to stop the majority of ordinary investors, with modest dividend income, from having to complete a tax return.
So looking at the changes in monetary terms, the additional cost from next April of someone making a net profit of £28,000, after deducting their salary [equal to their personal allowance] as a directors remuneration, will be approximately £1,700. However, this still leaves them roughly £1,200 better off than someone that runs their business as a sole trader.
The company structure is still optimal, but the decision to incorporate is now more marginal. But lets not lose sight of the other benefits of having a limited company, such as the limited liability status of a company, separation of business and personal assets, slightly different and more generous rules relating to the expenses you can claim, better tax planning opportunities with dividend timing and the status of being a company. In our opinion these benefits are still worth having, despite the additional administrative burden and slightly higher costs.
In preparation for these changes we would suggest making sure that you have paid yourself the optimal amount of dividends in the current year before they become 7.5% more expensive to receive. If you would like any further information on this or any other aspects of your taxation affairs, please don’t hesitate to get in touch with one of our qualified accountants.