Showing posts with label corporation tax. Show all posts
Showing posts with label corporation tax. Show all posts

Saturday, April 22, 2023

A Fine Balance between Salary and Dividends

The tax code changes that have been announced by the UK government will have an impact on the way a company owner pays himself. One of the main changes is the increase of the corporation tax rate, which is the tax paid on company profits. The corporation tax rate will rise from 19% to a maximum of 25% from April 2023 for companies whose profits are above £50k. That means that company owners who pay themselves dividends will have less profits left in their company after having paid corporation tax. 

Another change is the reduction of the dividend allowance, which is the amount of dividend income that is tax-free. The dividend allowance will be cut from £2,000 to £1,000 from 6 April 2023 and then again to £500 from 6 April 2024. This means that company owners who pay themselves dividends above these thresholds will pay, again, more tax on their dividend income. 

If you add to that the fact that in contrast to salary, dividend rate increase was not overturned last year resulting in 1.25 percentage point across the board (8.75% for the basic rate, 33.75% for the higher rate and 39.35% for the additional rate) it's easy to understand why the tax situation has seriously worsen for the UK company owner. 

How Tax Code Changes Impact Company Owners 

One may wonder if these changes will affect the optimal split between salary and dividends for company owners who want to minimise their tax liability. Generally speaking, paying a low salary and high dividends has been a tax-efficient strategy for company owners, as dividends are not subject to National Insurance contributions and have lower tax rates than salary. However, with the increase of the corporation tax rate, the reduction of the dividend allowance and the increase of the dividend tax rates, this strategy may become less attractive. 

One thing is certain, the situation is now a lot more complex. In order to assess the optimum split between salary and dividends, one now needs to know the profit level of the company since it affects its corporation tax rate, the size of the payroll since it affects the availability of the employers allowance (the £5K NIC allowance), the overall level income of the company owner since it affects the availability of the personal allowance and many other factors. While in most situations it's still more tax efficient to take a salary of up to the personal allowance of £12,570 there are many cases where it's not necessarily true anymore. 

Because we now have effectively 3 different marginal corporation tax rates, let's look at the effective rates of taxation combining corporation tax, national insurance, and income tax in each different case. We assume that the dividend allowance has already been used. 

Wednesday, February 22, 2023

Major UK Corporation Tax Changes in April

Corporation tax is a tax that companies pay on their UK profits. The current rate of corporation tax for all companies in the UK is 19%, regardless of how much profit they make. 

However, this was not always the case. Corporation tax was introduced in 1965 as part of the Finance Act 1965. 

The rate has changed over time, from 28% in 2010 to 19% in 2017 and it will change again from 1 April 2023, when new rules will come into effect. Here are the details.

The New UK Corporation Tax Rates


From 1 April 2023, there will be two different rates of corporation tax, depending on the level of profits:

  • A small profits rate (SPR) of 19% for companies with profits up to £50,000
  • A main rate of 25% for companies with profits over £250,000

There will also be a marginal relief for companies with profits between £50,000 and £250,000, which will reduce their effective tax rate gradually from 25% to 19%.

The new rates will apply to financial years starting on or after 1 April 2023. For example, if your company's accounting year ends on 31 December, you will pay corporation tax at the new rates for the year ending 31 December 2023.

How to Calculate Your Corporation Tax


To calculate your corporation tax liability, you need to work out your taxable profits. This is done by deducting your allowable expenses from your income. Some examples of allowable expenses are:

  • Staff salaries and wages
  • Rent and utility bills
  • Business travel and subsistence
  • Advertising and marketing costs
  • Interest on business loans
  • Research and development costs

Wednesday, June 19, 2019

Managing cash in your business

With interest rates at a record low in the UK, and with dividend tax rates now going up all to way to 38.1% for additional rate tax payers, many small businesses are reluctant to extract money from their limited company and are wondering how to make that cash left in the business produce significant income. Unfortunately there is not one single answer and each available options comes with its own benefits and drawbacks.

Savings Account

The simple answer is to open a savings account for the company. Most banks will allow for that but unfortunately the rates are ridiculously low. Major banks will typically pay between 0.5% and 1% depending on how long you are willing to lock your money for. And while it's possible to find slightly better rates at smaller banks or financial institutions, one has to be aware that the Financial Services Compensation Scheme (FSCS) that protects personal accounts up to £85,000 is not always available for Limited Companies.

Monday, November 21, 2016

Dividend strategies for post April 2016

Prior to 6 April 2016, there was generally a tax advantage to extracting profits by way of dividends, often once a salary had been taken to utilise the personal allowance and ensure entitlement to certain state benefits. With the new dividend taxation regime from 6 April 2016, the tax advantage of dividends as opposed to salary / bonuses is reduced or in certain cases eliminated entirely. However, dividend planning is still important and is not as straightforward as it appears on the surface. Dividend planning strategies include cashflow and administrative ease as well as tax savings.

Many companies distribute dividends on a monthly basis as a means of providing themselves with a 'salary-like' income. In many cases it is only through habit and there is no reason that these frequent distributions shouldn't be replaced by a less frequent dividend followed by drawings against their current account with the company.

Thursday, May 19, 2016

10 Reasons why it's still worth going Limited

With the recent increase in dividend taxation, many of our clients are asking whether it still makes sense to incorporate when you are a Sole Trader. It's a tough question to answer as indeed, the tax benefits of running a business as a Limited Company have now been seriously curtailed. If you extract all of the profits from your company as they arise, the total tax and national insurance (NI) paid is now almost identical whether your are operating as a Limited Company or a Sole Trader.

There are still a number of benefits however to operate as a Limited Company. Here they are:

1. Better legal protection

As the name suggests, if you run a Limited Company, you are protected in case things go wrong. Assuming no fraud has taken place, you will not be personally liable for any financial losses made by your Limited Company. Those running a business as self employed do not enjoy such protection from financial claims if things go wrong with their business. While it's possible (and recommended) to subscribe to a professional liability insurance, there is always a risk of running foul of the fine print...

2. More professional image or status

In some industries, having a Limited Company can provide a more professional image. If you are doing business with larger companies, you may find that they prefer to deal only with Limited Companies rather than Sole Traders or even partnerships. Indeed by being transparent, adhering to regulatory requirements and opening up company accounts to public scrutiny, you are demonstrating that the business is being correctly managed and this inspires confidence.

3. Wider availability of some contracts

The reason bigger corporations do not hire Sole Traders is not just image or professionalism but IR35 risk. The IR35 regulation was put in place to prevent employees to set up shop as free-lancers just to save tax. In other words if HMRC decides that a free-lancer behaves as an employee, then he is required to pay the same amount of tax and NI as an employee would. He he does not, whoever hired him is responsible for the back tax and NI, unless he operates as limited company (and in which case that limited company is responsible). It's easy to understand then why some organisations will only deal with limited companies!

4. Name protection

Once you register your company with Companies House, your company name is protected by law. No-one else can use the same name as you, or anything deemed to be too similar. As a Sole Trader, you can use a trading name but it's not protected and there is nothing to prevent a competitor to start using the same trading name as you. While it's possible to protect a trading name with a trademark, it will be in practice a lot more expensive than just creating a company with that name.

Friday, August 15, 2014

Using goodwill to save tax on incorporation

Incorporating a sole trader may happen for a number of reasons. For example you started a business on the side not sure whether it would work out and you wanted to reduce overhead costs initially. After a while the success is here and you want to make use of the lower taxes enjoyed by limited companies. Another reason could be that you had paid significant taxes prior to starting your business and because, as a sole trader you can offset trading losses against salaries in previous years, it makes sense to not incorporate right away if you know that your business will incur losses initially. Once the business starts to make a profit however, it makes sense to incorporate.

Incorporating means creating a company and having this new company of which you are the shareholder buy the existing unincorporated business from yourself. If the value of your business is say £100,000 you will make a capital gain of £100,000 and your company will have a goodwill of £100,000 on its balance sheet (assuming there are no fixed assets). Either the company pays you right away or most probably it credits the director's loan account allowing you to draw funds as they become available in the business. But why is it a good thing?

Friday, November 1, 2013

Director's Loan Accounts: beware if overdrawn

A director's loan is a loan made by a company to a director (or related party). HMRC has been trying to prevent directors to borrow money from their business because this is money they would have to draw either as salary or dividends otherwise and pay tax and NI on those amounts.

In 2010 HMRC published the Corporation Tax Act 2010 and section 455 put in place some rules to prevent the practice: if a close company makes a loan to a relevant person who is a participator in the company or an associate of such a participator and if this loan is outstanding at year end, then 25% of that loan will have to be paid under Corporation Tax to HMRC -- unless the loan is reimbursed before tax is due (usually 9 months after the year end). Moreover, if at any point in time, the loan balance is above £5,000 the whole loan becomes a benefit in kind for the director.

Monday, April 16, 2012

Top tax saving tips for the self-employed

The most frequent question I get when I meet clients starting their new business is how to reduce their taxes. Obviously this is a loaded question and most of the work we do is geared towards insuring that our clients pay their fair share but not more! There are hundreds of ways you can reduce your tax liability but if you can do just 5 things, here they are:

1. Incorporate

When you start your own business, you have basically 2 options: run your business as a sole trader (or a partnership) or setup a limited company. The sole trader option can seem quite attractive since it's quite simple to administer. However, using a limited company can bring significant tax savings since companies are not subject to National Insurance. As a matter of fact, for a company with annual profits of £80,000 the overall tax savings can be as much as £5,000 per year.

Wednesday, March 21, 2012

Budget Summary 2012

Amidst fears of a double-dip recession, Chancellor of the Exchequer George Osborne had the unenviable task of presenting the Budget for the third time on 21st March. It came as no surprise when the Chancellor announced very early on in his speech that there would be no "unfunded giveaways", confirming speculation that any concessions would need to be offset by an increase in tax elsewhere.

Although there was a significant change to the Stamp Duty on residential property costing over £2,000,000, the wealthy will benefit from a cut in the top rate of tax down to 45% from April 2013 (currently 50%). Individuals will gain from an £1,100 increase in the personal allowance from April 2013 but they could also lose out if they are earning over £50,000 and in receipt of Child Benefit. Large companies will welcome the 2% cut in their rate of corporation tax. But whether small or large, all businesses were disappointed the government did not reverse their plans to reduce the Annual Investment Allowance to just £25,000.