Financially yours by Watkinson Black
THE first Conservative budget seemed tame at first sight. However, there were two measures that will have a massive impact on small businesses in the future.
The first is the new tax treatment of dividends. The second is the removal of the NIC “Employment Allowance” from one-man limited companies.
Chancellor George Osborne
Currently, dividends carry a tax credit of 10%. Whilst dividends are not deducted from the profits of the company before calculating the company’s tax they do not attract any further tax on the recipient provided that the recipient is a basic rate taxpayer.
Also, there is currently a reduction in the employers NIC payable by a company of up to £2,000 in each tax year, and this is set to increase to £3,000 next year. This is the “Employment Allowance”.
From April 2016, however, all this will change. Firstly, a new tax free dividend allowance of £5,000 per person will be introduced. However, all dividends received above that amount will be taxed at a minimum of 7.5%. At the same time, the Employment Allowance will be removed from “one-man” limited companies.
The combined effect of the above changes is to remove the current tax incentive to sole-traders to transfer their business into a limited company. There may still be a very small tax saving to businesses with profits of about £12,000 to £15,000 but the additional costs of operating as a company will most probably more than outweigh any savings, and even these possible small savings very rapidly disappear as profits increase.
There may still be a tax saving if a sole trader’s profits exceed the basic rate tax band, and the excess profits are retained within the company for re-investment. Similarly, if there are other reasons to operate through a company then dividends may still show a tax saving compared to salaries subjected to PAYE and National Insurance. The only way to find out is to “number-crunch” in each case.
One thing is certain. The government have finally achieved their aim when the ill-fated IR35 provisions were introduced over 10 years ago, and the golden days of saving tax by operating through a company have disappeared.
WatkinsonBlack are pleased to advise on these and other matters. They have considerable experience in all areas of taxation and businesss services, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
For more information visit www.watkinsonblack.co.uk
