The goal posts have moved. How are accountants going to advise clients about the merits of retaining a self-employed status or incorporating their businesses?
From April 2016, the new dividend tax will chip away at the tax savings that could previously be obtained from incorporating, taking a minimal salary (to avoid NIC) and the balance of a remuneration package as a dividend.
For example, a business with trading profits in excess of £150,000, where shareholder directors are keen to get their hands on the company’s disposable income, would seem to be a prime candidate for the low-salary high-dividend approach. Not so from April 2016.
With profits in excess of this amount, and all post tax profits distributed as dividends, it may be cheaper, tax-wise, to stay self-employed… Why is this? The new rates of dividend tax, especially at the higher rate and additional rate end of the spectrum are lifting upwards of 32.5% (higher rate taxpayers) and 38.1% (additional rate taxpayers). Profits funding dividends at this level have already had corporation deducted at 20% so the total tax take at higher income levels outstrips a self employed person’s maximum 45% rate significantly.
Of course, tax considerations are just part of the debate. What about liability issues? What about businesses that are content to “money-box” retained profits and not fully distribute reserves as dividends?
Advisors will need to do the sums.
A final red-flag on this issue. HMRC seem to be taking an interest in small companies’ reserves, and asking questions… A recent consultation points to an interest in distributable reserves that are not required for the commercial needs of a company. Fingers crossed that in the Budget next month George does not resurrect “apportionment” and advanced corporation tax!