David Cameron and George Osborne have been at it again. In sneaking through the 2015 budget announcement that taxes on dividends will change, they have increased the burden of tax on company owners. But is this good for the country and what does it mean for business owners?
From April 2016 the tax credit attached to dividends will be removed, which means removing the concept of grossing up. Everything will be triggered based on the actual amount of cash received and dividends will be taxed at 7.5%, 32.5% and 38.1% depending on the taxpayer’s marginal rate of income tax, which represents a tax increase of 7.5% compared to tax rates 2015/16. The Chancellor has given some relief though, by introducing a GBP5,000 allowance before any dividend tax comes into play. In addition, as corporation tax rates fall still further from their current rate of 20% to 18% by 2020, there will be additional tax savings.
Bottom line: Most taxpayers will pay more, but some will pay less. There are also some tax planning tips such as transferring shareholdings into ISAS, building up reserves and distributing on a liquidation to benefit from Entrepreneurial Relief, paying out varying dividends in different years depending upon your overall personal tax position. There is also often an advantage in paying out more dividends before April 2016 than would otherwise be the case. Moore Stephens research shows small companies paid out 63% of their profits as dividends last year as compared to 43% the year before.
Does this mean the demise of the limited company? Certainly not.
Firstly, for most income levels there are still tax savings in incorporating. Compared to being taxed as an employee, the savings are still huge and this is the clearest indication that the Government continues to advocate and encourage individuals to incorporate limited companies. Indeed company tax is also consistently lower than self employed tax for almost all income levels, so trading through a limited company, from a tax perspective, still often remains the preferred vehicle. But to consider tax in isolation is missing the bigger picture.
The Bigger Picture
British companies are prestigious. No doubt about it. People from all over the world believe in the solidarity, honesty, fairness and openness of British business. Trading as a self employed person or partnership (unless as a professional practice) just doesn’t hack it. And the cost of company formation in Britain is minimal. So is the inconvenience. Never has it been easier than today to form a company…and you can do so whilst simultaneously setting up a bank account. Electronic filings of Annual Returns and statutory changes in respect of directors, shareholders and registered office are equally simple, with online options available. Companies also often offer an inexpensive insurance policy due to the concept of limited liability. They simplify the relationship between owners and managers/directors through a codified legal document known as the Articles of Association.
Annual accounts need to be filed, but over the years the information for small companies has been reduced to the extent that competitors can gain very little advantage from accessing this publically available information. Furthermore, no audit is required unless more than two of the following requirements are fulfilled:
- Annual turnover of at least GBP6.5million
- Assets of at least GBP3.26million
- More than 50 employees
The company will also need a PAYE scheme, as in almost all cases, you will want to be paid some salary in your capacity as a director of the company. But the good news is that with the increased use of computer systems and straightforward, easy to understand bookkeeping and final accounts programs, most of the work associated with this is minimised. This means that the increased accountancy fees, as compared to trading as a sole trader/partnership, are usually not a significant part of the overall take home pay comparison between unincorporated versus limited company. After a careful review of your own financial position, your accountant will, given your own specific circumstances, be able to guide you through the maze and suggest the most appropriate trading structure for you.
So What Now?
Stay focused. Do the things you want to do to achieve success. Let the accountant take the strain of filings and taxation and you stick to what you are best at, which is keeping your customers happy and running your company to your best ability.