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Self-Employed Income Support Scheme

Published: 26 Mar 2020

Updated: 26 Mar 2020

 

Written by Ray Coman

 

Covid19An announcement made today on 26th March aims to bring the support available to the self-employed in line with that already available to employees via the Coronavirus job retention scheme.

 

Grant calculation

Income criteria

Trading criteria

Payment date

Application process

Alternative finance

Working through a limited company

 

Grant calculation

 

A self-employed person can obtain a grant equal to the lower of 80% of net monthly income and £2,500.  Net monthly profits are based on an average of profits for the preceding three tax years.

 

Income criteria

 

Only sole traders or partners with profits below a set limit will be eligible.  The limit is:

 

  • Either a profit of £50,000 or lower for the tax year of 2018-19; or
  • An average profit of £50,000 for the tax years 2018-19, 2017-18 and 2017-16.

 

Therefore, if 2018-19 resulted in a profit spike, eligibility could still be intact by reference to earlier years.  Where self-employment started after 6 April 2016, only the tax years of self-employment would be included in the averaging calculation.  Over 50% of income must be derived from self-employment activity.

 

Trading criteria

 

Unfortunately, sole traders who have registered in 2019-20 will not be eligible.  Sole traders still need to be in business for 2019-20, (or still in business were it not for Covid19), and with the intention to continue trading during 2020-21.  A sole trader must submit a 2018-19 Tax Return by 23 April 2020 in order to protect eligibility.

 

Payment date

 

The grants will be paid from 1 March 2020 to 31 May 2020.  HMRC intends grants to be payable in one lump sum from about June.

 

Application process

 

The facility for making an application is not yet available through the website.  There is no requirement to contact HMRC at this stage.  HMRC will contact taxpayers already registered as self-employed in due course.  Applications will be via online form.

 

Alternative finance

 

Until such a time as the grants are available, self-employed can access cash via Universal Credit and the Coronavirus Business Interruption Loan Scheme.

 

Working through a limited company

 

Sole directors can obtain the grant for Coronavirus job retention scheme if a payroll has been operated.

 

Covid19

Published: 21 Mar 2020

Updated: 26 Mar 2020

 

Written by Ray Coman

 

Covid19The coronavirus is spreading in the UK and across the globe, causing illness and death.  Yesterday, and for an unspecified amount of time, schools, universities, restaurants and other public meeting venues closed.  To encourage business owners to stick to the official guidelines and to mitigate the economic impact, a raft of emergency measures were announced on 20th March 2020.

 

Coronavirus job retention scheme

Coronavirus Business Interruption Loan Scheme

Statutory Sick Pay

Self-employed universal credit

Deferral of payments on account

Time to Pay arrangements

VAT deferral

IR35 postponement

Business rates

Retail and Hospitality Grant Scheme

Residency, domicile and remittance

Self-Employed Income Support Scheme

 

Coronavirus job retention scheme

 

The government has pledged to pay UK businesses suffering due to employees unable to work on account of Covid19.  The aim is to encourage employers to retain staff to prevent largescale disruption to employment.

 

A grant will be available to cover 80% of gross pay per ‘furloughed’ employee, up to a maximum of £2,500 per month. Gross pay for this definition includes employers' NIC and the statutory minimum of pension contributions.  

 

Pay going back to 1 March 2020 will be covered by the scheme.  The payment scheme will initially run to 31 May 2020.  The reference period for determining gross pay will be the month eneded 28th February 2020.  This is to prevent artifical increase of wages post announcement, for the prupose of increasing grant entitlement.  Full pay should be made via payroll and would be subject to PAYE tax, NIC and pension contribution liability for both employee and employer.

 

Affected workers are designated as “furloughed”.  This means that they cannot work for the employer but are, nonetheless, retained on payroll.  The employer needs to inform the employee in writing that they have been furloughed.

 

The grant will be applied for via an online portal on the HMRC website.  However, at the time of writing (21st March 2020), the application facility has not been made available.  HMRC have announced that they aim to have a submission system available by the end of April.  With the measures so new, payroll software providers are yet to release updates to accommodate the required ‘furloughed worker’ adjustments.

 

The sole director of a company can be a furloughed employee.  However, a furloughed employee cannot work and therefore the company of the contractor could not have any income during the period of the claim.  Inconsistency of work is in the nature of self-employment, and therefore a claim for salary support would be inconsistent with a basis for the company to be taxed outside of IR35.  Where lack of work is prolonged, the alternative of becoming a sole trader and relying on the benefits available in that scenario are more tenable.  SSP reclaims would apply in some cases to directors out of work due to illness.

 

Coronavirus Business Interruption Loan Scheme

 

 

For the week commencing 23rd March 2020, new loan types will be available to cover business interruption.  Participating lenders will be able to provide loans which are guaranteed by the government.  For the first 12 months, interest will be paid for by the government rather than by the borrower.  With no interest to pay, the tax effect would be neutral.  The scheme will be facilitated by mainstream lenders.

 

Certain organisations, such as households providing domestic staff and membership organisations will not be eligible.

 

Statutory Sick Pay

 

It has not been possible to reclaim Statutory Sick Pay (SSP) since 2013-14.  However, the government has announced that it will reimburse employers SSP for up to 2 weeks where the employee’s absence was caused by SSP.  Affcted workers would obtain an 'isolation note' from HMRC.  The mechanism for government repayments has not yet been set up on the HMRC website.

 

Self-employed universal credit

 

Self-employed workers who must stay at home because of Covid19 symptoms would not be eligible for SSP.  In this case, a self-employed worker can claim Universal Credit, up to the rate of statutory sick pay and without having to visit the JobCentre.  The chancellor also announced a general increase in universal credit allowance by £1,000 lasting twelve months.

 

Deferral of payments on account

 

Payments on account due by 31 July 2020 can now be deferred until 31 January 2021.  No late payment interest applies to 2019-20 second payments on account during the deferral period.  This will provide cash flow relief to individuals under self-assessment.  The new payment date applies automatically with no need to notify HMRC.

 

Time to Pay arrangements

 

HMRC Time to Pay arrangements will remain in place.  A taxpayer struggling to find the cash to settle a liability can contact HMRC directly.  An arrangement would spread the tax payments beyond the due date and without suffering late payment penalties that would otherwise apply.

 

VAT deferral

 

VAT payments normally due in a deferral period can now be postponed.  The deferral period is from 20 March to 30 June 2020.  Traders will have until 31 December 2020 to settle VAT liability otherwise payable in the deferral period.  The deferral applies automatically and does not need to be applied for.  The mechanism by which the payments will be collected has not yet been made clear.  Any VAT refunds would be processed in the usual timeframes.

 

IR35 postponement

 

The IR35 rules tax place a PAYE requirement on an individual who would be an employee ‘but for’ a company.  The rules are an anti-avoidance provision designed to stop employees forming companies simply to avoid national insurance.  A new ruling was designed to make it the responsibility of the person hiring to assess whether an individual was employed or self-employed.  This new ruling was due to come into force on 1 April 2020.  However, the ruling could also have the effect of deterring business from expanding operations with contractors.  As a result of the impact of Covid19 on the economy, the new ruling will not come into effect until 1 April 2021.

 

Business rates

 

A business rates holiday for 2020-21 will apply for those worse effected in the sector leisure, retail and hospitality sectors.  Businesses do need to make an application. The rates relief is automatically applied.

 

Retail and Hospitality Grant Scheme

 

The scheme provides support of up to £10,000 for affected businesses.

 

Residency, domicile and remittance

 

Days in which an individual is required to stay in the UK as a result of 'lockdown' measures will be treated as exception for the purpose of determining tax residence.

 

Self-Employed Income Support Scheme

 

The Self-Employed Income Support Scheme was introduced three days after the initial package of support.  It is detailed on a separate page found through the link above.

2020 Budget

Published: 11 Mar 2020

Updated: 17 Mar 2020

 

Written by Ray Coman

 

2020 BudgetWith a new government, now comfortable in its majority, new Chancellor, an outgoing Bank of England governor and its first since leaving the EU, the 2020 Budget was bound for the limelight. Rishi Sunak, boasted the largest fiscal boost for 30 years with substantial allocations for infrastructure, roads, housing and education. It was billed as a plan for prosperity.

 

Pension allowance threshold increase

Entrepreneur's relief

Lower tax for certain gains on life insurance products

Structures and buildings allowance to increase

National insurance threshold to rise

Employment allowance up by £1,000

Notable exceptions

Research and development credit rises

Non-resident companies owning property

Corporation tax unchanged

Capital gains tax

Restriction on use of carry forward losses for large companies

Other measures

Summary

 

Pension allowance threshold increase

 

The pension allowance is the annual amount that a taxpayer can invest in a pension and obtain tax relief.  It is currently £40,000.  However once net adjusted income exceeds a threshold, the allowance reduces from £40,000 to a minimum amount.  The amount of the reduction is £1 for every £2 that income exceeds the annual allowance.  The threshold is currently £150,000 for net adjusted income.  Net adjusted income is income plus employers’ pension contribution.  The threshold for income (i.e. after deduction of employer’s pension contribution) is currently £100,000.  More information can be found in the guidance on pension allowance.

 

Both thresholds are due to increase by £90,000.  The adjusted income threshold will increase to £240,000 from 6 April 2020.  The floor has been lowered from £10,000 to £4,000.  The amount below which the allowance cannot be tapered has reduced to £4,000.  The difference between the £40,000 maximum and £4,000 minimum is £36,000.  Applying the £2 for every £1 formula, tapering will stop at £240,000 plus (£36,000 x 2) or £312,000.

 

The allowance effects 2020-21 and future years only.  Tapering of allowance in previous years will be subject to the old rates for pension allowance of £150,000 adjusted income and £10,000 minimum threshold.  In his speech, the chancellor spoke about the increase in the allowance as a measure that would help health professionals.  He explained that 98% or consultants and 96% of GPs would no longer have pension allowance tapered.  On account of above average income, the measure will help medical professionals, but the reform is applicable to all higher income taxpayers.

 

Entrepreneur’s relief

 

This concession applies to gains made by business owners and more detail can be found in the rates table for capital gains.  Broadly, the relief allows business owners to dispose of their interests and suffer tax on any gain at a flat rate of 10%.  The rate otherwise applicable to gains is 20% to the extent that an individual is a higher rate taxpayer.  The rate is even higher for gains on disposal of residential property that is not the owner’s home.  The more generous rate applies only to gain made below an annual lifetime limit.  This limit was previously set at £10 million.  From 2020-21 the lifetime limit is reduced to £1 million.

 

The limit was £1million when entrepreneur’s relief was first introduced.  The lifetime limit is therefore returning to its 2008-09 threshold when the relief was brought in (to replaced business asset taper relief.)  It is not expected to impact many individuals.  An owner must have at least a 5% stake in the investment and the average shareholder will remain unaffected by the cut.  Most proprietary businesses will not be disposed of for over £1 million.

 

The lifetime limit also applies to shares in Enterprise Management Incentives.  The new measure takes effect from today, 11 March 2020.  Gains above the threshold will be subject to the higher rate capital gains tax that applies to disposals of shares and business assets of 20%.

 

Lower tax for certain gains on life insurance products

 

Gains made on certain life insurance products are subject to income tax.  The way that tax is calculated on these gains is referred to as top-slicing.  The calculation of top slicing relief has changed so that personal allowance is reinstated in the calculation.  Personal allowance is abated for individuals earning over £100,000 and foregone by non-domiciled individuals claiming the remittance basis.  The new calculation applies to any gains made with effect from today, i.e., 11 March.

 

Structures and buildings allowance to increase

 

Construction work on buildings that are used for trading or investment purposes (but not for residential or furnished holiday let purposes) are eligible for a capital allowance.  The building cannot have been a dwelling the first time it was used or during the period the allowance is claimed.  The capital allowance is a ‘straight line’ calculation.  This means that the percentage that can be deducted from profits is a fixed percentage of the original construction cost.  The percentage was 2% from the time the allowance was introduced on 29 October 2018.  However, following the announcement from today, it will increase to 3% from the start of the next financial year, on 1 April 2020.

 

Investment in “Enterprise Zones”, which are specific locations in the UK will continue to enjoy Enhanced Capital Allowances until March 2021.

 

National insurance threshold to rise

 

 

The national insurance threshold will increase in 2020-21 to £9,500.  The new limit will reduce tax for sole traders and employees.  In recent years, the threshold for employers and employees has been the same.  However, the national insurance limit for employers is only increasing to £8,788.  The upper threshold will remain at £50,000.  The most tax efficient salary paid from a contractor company in 2020-21 will be £732.

 

Employment allowance up by £1,000

 

This tax relief exempts employers’, or secondary, national insurance.  It is not available to companies with only one director.  From 6 April 2020, the allowance will increase from £3,000 to £4,000.  There is a further national insurance concession for employers hiring army veterans.

 

Notable exceptions

 

  • The personal allowance and higher rate tax threshold have not been changed from their 2019-20 levels of £12,500 and £50,000 respectively.
  • The process by which the value of a tax threshold is eroded by inflation is referred to a fiscal drag.
  • It has been highlighted as an issue for nil rate band for inheritance tax which has been fixed at £325,000 since 6 April 2009.
  • The additional tax rate of 45% still begins at £150,000.
  • The personal allowance abatement threshold is also unchanged at £100,000.

 

Research and development credit rises

 

For qualifying expenditure on research, a company can claim an enhanced deduction from profits chargeable to corporation tax.  As an alternative to the enhanced deduction, the company can claim a credit.  The credit is a government payment equal to a percentage of the amount spent on R&D.  During the initial, loss making phase, the credit offers a more attractive cash flow alternative to enhanced expenditure.  The rate will increase from 12% to 13% on 1 April 2020.  A hike in the credit is aimed at promoting innovation and growth within the UK.

 

Non-resident companies owning property

 

Previously, a non-resident landlord company was subject to income tax.  However, from 6 April 2020 an overseas entity owning UK property will be subject to the same rules as a UK company.  In practice, the ruling removes overseas investors from the requirement to join the non-resident landlord scheme.  This scheme requires letting agents to withhold basic rate tax at source, unless HMRC approves an application to join the NRL scheme.  There is no tax incentive for new landlords to operate via a non-resident company.  Any foreign tax has been suffered on income will be available as a credit to reduce UK tax on the equivalent income.

 

Corporation tax unchanged

 

Corporation tax had previously been scheduled to reduce to 17% on 1 April 2020.  This was announced in the 2016 Budget.  However, as confirmed by the Budget today, the rate will remain at 19% for 2020-21.  The rate applied to Financial Year 2021, i.e. starting 1 April 2021, will also be 19%. 

 

Capital gains tax rate

 

The capital gains tax allowance will increase from £12,000 to £12,300 from 6 April 2020.  The rate is set to increase by the Consumer Price Index (CPI) rounded up to the nearest £100.  The rate applicable to trustees is half, i.e. £6,150.

 

Restriction on use of carry forward losses for large companies

 

Where a company makes a loss on an asset, this loss can be carried forward and set against future capital gains.  Announced in today’s Budget was a restriction which will allow only 50% of the allowable loss to be set against future gains of a company.  The new restriction applies to gains made on or after 1 April 2020.  The loss only applies to profits over £5 million.  It will not impact the small business sector directly.  Losses suffered by individuals are not affected by the proposal.

 

Other measures

 

  • Introduction of a stamp duty surcharge from April 2021, of 2% to non-residents.
  • Abolition of VAT on digital publication and sanitary products.
  • No planned increase in alcohol duty.
  • Cut interest rates on social housing by 1%.
  • A 100% discount on business rates for a wide range of retailers and entertainment venues.
  • Statutory sick pay is available for all self-isolated patients from day one, even if not displaying symptoms of coronavirus.

 

Summary

 

In response to the economic impact of coronavirus and a rate cut of 50 basis points in the morning, the Budget was aimed at reassuring markets with a package of fiscal stimuluses.  Policy was aimed as a reward to voters in the North and much called upon relief to the struggling high-street.  The UK still carries the highest tax rates of personal tax in the world.  It remains to be seen whether the spending plan can be sustainable in the context of an increasing mobile population.

Optimal contractor salary for 2019-20

Published: 10 Mar 2020

Updated: 11 Mar 2020

 

Written by Ray Coman

 

2019-20-salary calculationAs the end of the tax year approaches, the following calculations explain the optimal salary payments for companies with a sole director.

 

Employer's national insurance

Employment allowance

Tax planning

 

Employer's national insurance

 

A salary which is equal to the national insurance threshold of £719 is the most tax efficient.  A higher salary would give rise to 13.8% national insurance.

 

For instance, if a salary were paid up to the personal allowance threshold for 2019-20, the additional salary would be £12,500 minus £8,628, or £3,872.

  • Corporation tax saving on additional salary @19% = £735.68
  • Employers’ national insurance @13.8% = -£534.36
  • Corporation tax saving on employer’s NI as calculated above @ 19% = £101.52
  • Employee’s national insurance at 12% = - £464.64

 

(There is a slight increase in dividend which is as follows:

 

  • The reduction in corporation tax on salary would now be treated as dividend: £735.68
  • The reduction in corporation tax on employers’ national insurance would now be treated as dividend: £101.53
  • The employer’s NI would otherwise be treated as dividend: £534.34)

 

Net increase in income tax of £302.87 @ 7.5% or £22.72

Net tax cost = £184.52

 

The lower salary also spares the hassle (and exposure to late payment penalty) of having to make monthly PAYE payments.

Tax saving if paid as dividend rather than salary is £184.52.

 

Employment allowance

For contractors who subsequently hire staff, a higher salary could be beneficial.

Further information about this scenario can be found in point 14 of the guidance below:

https://www.gov.uk/government/publications/employment-allowance-more-detailed-guidance/single-director-companies-and-employment-allowance-further-employer-guidance

 

Provided the £3,000 employment allowance is still intact (and not used up with salary payments to the employees) the tax savings are as follows:

  • The additional salary would be £12,500 minus £8,628, or £3,872.
  • Corporation tax saving on additional salary @19% = £735.68
  • Employee’s national insurance at 12% = - £464.64
  • (There is a slight increase in dividend which is as follows:
  • The reduction in corporation tax on salary would now be treated as dividend: £735.68)
  • Net increase in income tax of £735.68 @ 7.5% or £55.18

Net tax saving = £215.86

 

Tax planning

 

Careful director’s remuneration planning should consider:

 

  • Optimal salary payments;
  • Timing of dividend extraction;
  • Use of proposed dividend to bring total income up to higher rate tax threshold;
  • Pension contribution;
  • Accumulation of retained profit for extraction as capital on eventual dissolution or sale of the business;
  • Addition of family members with whom the owner shares household bills; and
  • Investment in capital.

2018-Budget

Published: 29 Oct 2018

Updated: 30 Oct 2018

 

Written by Ray Coman

 

2018 BudgetPhilip Hammond spoke for over an hour earlier this afternoon delivering his last Budget before the UK exits the EU.  The UK is set to officially leave the EU on the Brexit Day of 29 March 2019.

 

Hammond was able to deliver positive figures relating to UK growth and a reduction in government borrowing.  He spoke about the age of austerity coming to an end.  A round up of the key changes announced which will affect personal taxation are offered below:

 

Raise in personal allowance and higher rate tax threshold

Off-payroll rules to extend to private companies

HMRC to become preferred creditor following insolvency

Extension to minimum holding period to qualify for entrepreneur’s relief

Annual Investment allowance increase

Non-residential building allowance

Digital Services Tax

Letting relief to be narrowed

Restriction on Principal Private Residence relief

R&D tax credit to be limited

VAT threshold frozen

Other changes

 

Raise in personal allowance and higher rate tax threshold

 

The Chancellor delivered the most significant measure in his speech as a last item. The personal allowance will increase to £12,500 and the higher rate tax threshold to £50,000 with effect from 5 April 2019.

 

Increases in the personal allowance and tax threshold have been one of the most popular of the Conservatives Manifesto pledges.  In April 2019, the personal allowance was increased to £11,850 and the higher rate tax threshold to £46,350.  The increase to £12,500 and £50,000 respectively had been planned for April 2020.  The Budget announcement made this afternoon brought forward that rise by one year.

 

The rates and allowances from 2020-21 will be raised in line with indexation.  Increasing tax thresholds with inflation is intended to prevent so called ‘fiscal drag.’

 

Off-payroll rules to extend to private companies

 

The ‘IR35’ rules seek to tax an individual as an employee who would be an employee but for a company.  The rules are designed to prevent people from forming companies solely to save tax, mainly in the form of employer’s national insurance.  Until now, the onus has been on the company owner to demonstrate that they are actually self-employed, to avoid the application of IR35.  However, the government will now place responsibility with the hiring company to demonstrate that workers operating through companies are being taxed appropriately.

 

The tax savings of operating via a limited company are substantially in the form of savings in employer’s national insurance.  The new regulations will place the onus of proof on hiring companies to ensure compliance of contractors with IR35.

 

Announced in the Budget is a delay in the new rules until April 2020.  The regulation will not affect small entities but only large and medium sized employers and their intermediaries, such as hiring agents.  It should come as a relief to one-person company owners who will have less pressure to prove the status of working arrangements from which their client often stands to benefit the most.  The regulation could pave the way for the cut in corporation tax scheduled for April 2020 to proceed without an accompanying sleu of personal service companies as witnessed in the past.

 

HMRC to become preferred creditor in insolvency

 

Since 2003, amounts due to HMRC in VAT and PAYE have not payable ahead of other creditors in the event of a business folding.  A change to this regulation will mean that from 6 April 2020, in an insolvency, HMRC will be preferred for the payment of VAT, PAYE and CIS deductions.  The rules on corporation tax and income tax remain unchanged.  Therefore, amounts paid to the business for VAT from its buyers, or withheld from employees in income tax, national insurance and CIS will be payable to HMRC ahead of trade creditors.

 

Extension to minimum holding period to qualify for entrepreneur’s relief

 

Hammond spoke about various calls to abolish or significantly reform entrepreneur’s relief.  This is a valuable relief for owner managed businesses and contractors which allows for a business disposal to be taxed at a significantly lower rate of tax than a profits extraction by dividend.  The relief also benefits senior employees who are awarded share in their employers’ company through the Enterprise management Incentive Scheme.

 

Following today’s announcements, the conditions required to qualify for Entrepreneur’s Relief must be met throughout a two-year period. This tighter requirement is an increase from the current condition which is just one year, and will be introduced from 2019-20. It is unlikely to affect the majority of business owners who hold their shares for well over a year in any case.

 

Annual Investment allowance increase

 

The Annual Investment Allowance will increase from £200,000 to £1 million for a period of one year starting 1 January 2019 and ending 31 December 2020.  This will benefit mainly larger businesses.

 

Non-residential building allowance

 

With immediate effect for contracts entered into on 29 October 2019, a capital allowance will be available on new non-residential structures.  Reminiscent of industrial buildings allowance which has been scrapped for many years, this will provide a tax form of depreciation for investment into commercial buildings.

 

Digital Services Tax

 

The Chancellor spoke about the slow pace of progress about implementing an international tax on digital businesses.  The current system of corporation tax extends to business which are incorporated in the UK or have central management and control exercised in the UK.

 

With effect from 1 April 2020 the government plans to charge a 2% tax on business with UK generated revenues.  The new tax will apply to technology companies with more than £500 million of annual profits. The tax is therefore targeted at the likes of Facebook, Apple, Amazon, Netflix and Google (FAANG.) While 2% is a modest target when compared to comparable rates affecting other corporations, it should at least result in some UK revenue from the tech giants.

 

Letting relief to be narrowed

 

Currently, letting relief is a generous tax break which exempts up to £40,000 of gains per owner.  The relief reduces the gains subject to tax where a property is let by its owner and former resident.  It was designed to discourage properties being left empty.

 

The reform announced today will restrict this relief so that it is only available to live-in landlords.  The new rules, which will take affect from 6 April 2020, could significantly affect any landlord letting out properties that were once his or her home.

 

Restriction on Principal Private Residence relief

 

The amount of gain which is subject to capital gains tax is reduced by period of occupation. So much of the gain which relates to a period that it was a person’s home is exempt from tax. In addition to actual periods of occupation, tax relief is available certain deemed period of occupation. This includes the final months of ownership.  Announced this afternoon, the final period of ownership will be halved from 18 months to 9 months.

 

R&D tax credit to be limited

 

It is possible for a business to claim a credit if it suffers a loss from research and development activity. The tax credit available to SME from 1 April 2020 will be restricted to three times the PAYE liability for that year.  This is an anti-avoidance provision designed to tackle an increase in the number of supposedly fraudulent claims.

 

VAT threshold frozen

 

Mr Hammond acknowledged a shortcoming in the current VAT registration threshold which obliges business to register as soon as the threshold is exceeded.  Apparently, EU regulation currently prevents the Chancellor from phasing in the effect of VAT for smaller traders.  He stated his intention to freeze the VAT registration threshold for a further two years until April 2022.  He indicated an intention to smooth the suddenness of the effect of the threshold for smaller businesses in the future.

 

Other tax changes

 

  • Business rates will be cut by one third over the next two years.  The tax break for smaller retailers is an attempt to relieve recent hardship on the high street.
  • The contribution required by smaller firms towards the apprenticeship levy will be halved from 10% to 5%.
  • Consultation will be launched to make the granting of certain license from public bodies dependent on the applicant demonstrating tax registration.

 

Author's note: The Chancellor expressed hopes of a 'double deal dividend' following the EU exit.  One gain in the form of unlocking a buffer he is holding in reserve pending the exact outcome of negotiations.  The other benefit deriving from the end of uncertainty.  The expectation is therefor set for a more relaxed fiscal policy ahead, which could include the much-anticipated cut in corporation tax scheduled for 2020.

Spring Statement 2018

Published: 13 Mar 2018

Updated: 13 Mar 2018

 

Written by Ray Coman

 

Spring Statement 2018The first budget that follows a new Parliament is traditionally the most punitive and, having got over that hump, regulatory reform seems to be calming. In this, the first Statement to occur in spring rather than autumn, there were no major announcements.

 

Against a background of increasing regulatory and tax burden for higher income and owner managed business and contractor sectors, the Statement content should come as some relief.

 

The chancellor announced a review of VAT. The consultation will include a proposal for graduating small businesses with a turnover between £85,000 and £115,000 into the 20% rate. The implementation may therefore be effective ahead of the making tax digital for VAT deadline scheduled for 1 April 2019.

 

In the light of recent announcements, the most that can be concluded from the statement at this stage is that no news is good news.

 

November 2017 Budget

Published: 22 Nov 2017

Updated: 01 Feb 2018

 

Written by Ray Coman

 

The 2017 Budget was delivered in the context of slowing economic growth.

 

The main headline from the Budget came from a reduction in stamp duty for first time buyers. For the purchases under £300,000 which is reckoned to apply to about 80% of buyers there will be no duty to pay. For homes worth between £300 thousand and half a million, there will be no tax on the first £300,000. First time buyers purchasing a home worth over £500,000 will pay stamp duty at the normal rate. The rules take effect immediately.

 

Various rates increased with effect from April 2018. The personal allowance is up to £11,850, higher rate tax threshold to £34,500, capital gains tax exemption to £11,700 and national living wage to £7.50 per hour. Until 31 March 2020, the VAT registration threshold of £85,000 is to be frozen.

 

The government intends to make the granting of certain licenses conditional upon proof of tax registration. This is to tackle the so call ‘hidden economy.’

 

2017 Budget

Published: 08 Mar 2017

Updated: 01 Feb 2018

 

Written by Ray Coman

 

imgur 5 w600The March 2017 Budget delivered by Chancellor Hammond this afternoon added further tax pressure to the self-employed and owner manager business sector. The speech descended into Pantomime at one stage with Hammond retorting 'oh yes we will!' to a heckle from the opposing benches. If it was a Pantomime Budget, the accountant was yet again cast as villain.

 

Increase in national insurance rate for the self-employed.

Cut to dividend allowance

VAT

Making tax digital

Promoter of Tax Avoidance

Cash basis

Recap on previous announcements

 

Increase in national insurance rate for the self-employed.

 

A self-employed individual is subject to a rate of (Class 4) national insurance of 9% on any profits over the small profits limit, currently £8,060 per annum. Announced in the Budget was a rise in this rate to 10% from April 2018 and again to 11% in 2019.

 

Cut to dividend allowance

 

A dividend allowance was announced by the preceding Chancellor, when the rate of income tax on dividends was hiked. Its effect is to treat as tax exempt the first part of any dividend received. The allowance, currently £5,000 will be decreased to £2,000 from 6 April 2018. This will affect self-employed people who conduct business through a company.

 

VAT

 

The Value Added Tax (VAT) registration threshold is set to rise to £85,000 from £83,000 in April; The de-registration threshold to also increase from £81,000 to £83,000.

 

Making tax digital

 

The government is introducing policy for businesses and landlords to report profits to HMRC once every three months. In today’s announcement, this requirement will be delayed by a year, to April 2019, for landlords, sole traders and partners with a turnover below the VAT threshold. Companies will be required to report profits once every three months from April 2018.

 

Promoter of Tax Avoidance

 

As previously announced in the 2016 Autumn Statement, a financial penalty will be imposed on any person involved in the promotion of a scheme which is defeated by HM Revenue & Customs.

 

Cash basis

 

Certain unincorporated business can account to HMRC for profits on the basis of cash paid and received.  This contrasts with the accruals basis used for other entities, where profits would be determined to a greater extent by invoice date.  The government has increased the threshold for accounting for profits on the cash basis to £150,000. Once the basis is applied it can continued to be used until profits reach £300,000.  The threshold is currently £83,000 and the proposal is due to be effective 6 April 2017.

 

Recap on previous announcements

 

The list below summarises forthcoming changes announced prior to the Budget:

  • Personal allowance to increase by £500 to £11,500 on 6 April 2017.
  • A £2,000 increase to the higher rate threshold
  • Class 2 NICs to be abolished from April 2018.
  • A cut in the rate of corporation tax to 19% on 1 April 2017 and again to 17% in 2020.

 

Autumn Statement 2016

Published: 24 Nov 2016

Updated: 24 Nov 2016

 

Written by

 

Autumn Statment 2016The newly appointed chancellor’s speech yesterday included many confirmations about the tax changes announced by his predecessor, Mr Osbourne.  However, the full report introduced an alteration to the flat rate scheme that will have a significant impact for contractors and other self-employed individuals.

 

Flat rate scheme to end for most contractors

Corporation tax

National Insurance

Personal allowance and higher rate tax

Salary sacrifice

Savings

Switching of Autumn and Spring announcements

 

Flat rate scheme to end for most contractors

 

The Autumn Statement brought an increase in the flat rate scheme to 16.8%.  The new percentage will apply to most contractors, regardless of their business activity.  Since the percentage is applied to VAT inclusive turnover, a flat rate scheme trader will now pay 19.8% of the 20% VAT collected.  This 0.2% benefit will effectively cancel the tax benefit of using the scheme.

 

The new percentages take effect from 1 April 2017.  At that point, most traders will be better off using standard VAT accounting, and recovering VAT on expenses.  For many, the accounting cost and hassle of being VAT registered will not outweigh any VAT recovery on expenses.  Traders registered voluntarily should consider VAT deregistration.

 

The flat rate scheme currently ranges between 11% and 14.5% for most businesses.  The highest percentage a trader can currently pay is 14.5%.  However, a contractor providing services typically has has relatively 'low costs' relative to providing services.  Only business that are not ‘low cost traders’ will be exempt from the new rules.  To continue to use the lower flat rate percentage, a business has to spend at least 2% of turnover on goods.  Goods in this case exclude:

 

  • Any services (such as telephone, rent, professional fees, insurance and sub-contractor costs.)
  • Capital items, (such as computer equipment and office furniture.)
  • Vehicles, vans and other motor expenses.
  • Food and drink consumed by the business. 

 

Even where the 2% test is met, a trader will not be excepted unless total expenditure on goods exceeds £1,000 per year.

 

Retailers, restaurants and other business with high cost of sales will, by and large, meet the test.  For IT contractors, management consultants and other service providers, the flat rate scheme is unlikely to be of any practical use.  For instance, it is remote that stationery and office consumables will comprise 2% of turnover.

 

Corporation tax

 

The Chancellor confirmed plans to lower corporation tax to 19% in April 2017 and eventually to 17% by April 2020.  The rate by 2020 is expected to give Britain the lowest company tax in the G20.

 

National Insurance

 

The employer’s (or secondary) national insurance limit will be slightly increased so that it is the same as the employees’ (or primary) national insurance limit.  The two thresholds will be aligned at £157 a week with effect from April 2017.  The change would not result in any extra tax liability for an employee.  The extra liability for an employer would be no more than £7.18 a week per employee.  The alignment is intended to simplify national insurance.

 

As announced in the 2016 Budget, Class 2 National Insurance Contributions, payable by self-employed people, will be abolished from April 2018.  A further Budget announcement confirmed is the liability of termination payments over £30,000 to national insurance.  The measure also takes effect in April 2018.

 

Personal allowance and higher rate tax

 

The government confirmed the previous announcement that the personal allowance will rise to £11,500 in 2017-18 and again to £12,500 by April 2020.  The higher rate tax threshold is also set to increase from £42,000 (in 2016/17) to £45,000 next tax year and eventually to £50,000 by 2020.  Following this, the personal allowance threshold will rise in line with the CPI measure of inflation.

 

Salary sacrifice

 

Salary sacrifice scheme describe an arrangement where an employee foregoes pay in order to receive some benefit.  Employee do not have to pay national insurance o benefits and therefore the scheme can bring a tax advantage.  Depending on the rate of an employee’s national insurance, a benefit could be as much as 12% cheaper if paid by salary sacrifice than out of take home pay.

 

The Autumn statement announced an axing of perks, such as gym and private healthcare memberships and smartphones from salary sacrifice.  Nonetheless, a tax benefit will still arise from sacrificing pay in favour of:

 

 

Therefore pension and childcare, which are the most common, benefit will not be affected by the new rules.

 

Savings

 

Further reiterations of the measures to be introduced in April 2017 included:

Increase ISA limit from £15,240 to £20,000 in April 2017.

Savings starting rate of £5,000 to remain in 2017/18

A new allowance of £1,000 each for trading and for property income.

 

Switching of Autumn and Spring announcements

 

The major fiscal announcements have until now been made in the Spring.  The Spring Budget will be replaced with an Autumn Budget, with the effect that 2017 will contain two Budget dates.  The reasoning behind the change is to announce tax changes further ahead of their implementation on 5 April.

 

The Autumn Statement will be replaced with a Spring Statement, the first of which will be in 2018.  The statements are presented as less major, although the impact of changes will vary from one taxpayer to the next.

 

2016-17 Contract company changes illustrated

Published: 17 Mar 2016

Updated: 12 Oct 2016

Written by

 

The emergency Budget of 2015 introduced rates of tax for dividends which had repercussions for contractors trading via a company and other owner-managed businesses.

 

Prior to 2016-17 there was often a clear tax benefit to forming a company compared with invoicing as a sole trader. This is because, unlike a sole trader, a company owner could take profits as dividend and thereby avoid national insurance.

 

The example below takes a company with profits after deduction of director’s salary of £90,000. Using the corporation tax rate for 2015-16 and 2016-17 which is 20%, profits available as dividend would be £72,000. In this case, the director receives a salary up to the national insurance threshold of £8,060 and withdraws all remaining profit as dividend.

 

Limited company calculation

 

 Income 2015-16

 

2016-17

 

 

£        

£                £        £             
Director’s salary   8,060   8,060
Gross dividend*   80,000   72,000
Personal allowance   (10,600)  

(11,000)

Dividend allowance       (5,000)
Taxable income   77,460   64,060
  Income Tax Income Tax
2015-16 @ 10% basic rate 31,785 3,178.50    
2016-17 @ 7.5% basic rate     32,000 2,400.00
2015-16 @ 32.5% higher rate 45,675 14,844.38    
2016-17 @ 32.5% higher rate     32,060 10,419.50
Tax credit   (7,746.00)    
Totals 77,460 10,276.88 64,060 12,819.50

 

Note in 2015/16 the dividend is grossed up by 100/90. Grossing up does not occur under the new rules.

 

Adding the corporation tax payable of £18,000, the overall tax burden increases from £28,276.88, to £30,819.50.  This tax is calculated on a profit, before salary of £98,060.

 

Sole trader illustration

 

The following table illustrates the tax implications of the same individual trading as an unincorporated business

 

 

 Income 2015-16

 

2016-17

 

 

£        

£                £        £             
Profits   98,060   98,060
Personal allowance   (10,600)  

(11,000)

Taxable income   87,460  

87,060

  Income Tax Income Tax
Income tax @ 20% basic rate 31,785 6,357.00 32,000 6,400.00 
Income tax @ 40% higher rate 55,675  22,270.00 55,060 22,024.00
Subtotal 87,460   87,060   
National insurance @ 0% 8,060   8,060   
National insurance @ 9% 34,325 3,089.25  34,000 3,060.00 
National insurance @ 2% 55,675 

1,113.50 

56,000 1,120.00
Totals 98,060 32,829.75 98,060 32,604.00

 

It can therefore be noted form the above that while a sole trader tax liability has not changed considerably in 2016-17, a company contractor now has a burden about the same as that of a sole trader.

 

Personal allowance abatement

 

 

Income over £100,000 would normally result in abatement of personal allowance. A sole traderdreach this abatementold with lower income than a contractor company. This is because corporation tax is deducted from income subject to income tax.

 

The tax benefit of a company compared with a sole trader will be significant if the profits in the above example were increased by say £10,000.

 

 

Benefits a limited company

 

 

Where the shareholder pays another person from their income a shareholder could be added so as to effectively double the £5,000 dividend allowance. A typical situation would be where household costs are shared with a spouse, who has no other dividend income.

 

 

The rate of corporation tax drops to 19% on March 2017 and again to 17% in March 2019. Therefore, the tax benefit of company compared with sole trader will become clearer.

 

 

It is not necessary to withdraw all remaining profit as dividend. Alternative could be to accumulate profits in the company and extract these as capital gains on eventual disposal of the company.

 

 

In the approach to the 2016-17 Budget the government entered a consultation on the abolition of entrepreneur’s relief for contractor companies. However this capital gains tax relief has remained intact.

 

 

The protection of limited liability which derives from using a separate entity through which to contract often suits both sides of the arrangement for non-tax benefits.

 

 

On account of the above, it can be maintained that a company pulls more credibility.

2016 Budget

Published: 16 Mar 2016

Updated: 18 Mar 2016

 

Written by

 

2016_BudgetMr Osborne delivered his eighth Budget as Chancellor at round 12.30pm today.  The Budget was announced against a backdrop of slowing global growth, recent interest rate cuts by central banks into negative territory and the forthcoming EU referendum in Britain.  The first two Budgets of our current government have been far reaching and full of surprises. This contrasts with the Budgets of the preceding coalition government which tended to alter very little.

 

The overviews below follow the chronological order in which the announcements were made, with some supporting explanation.

 

Loans to participators

Termination payments

Diverted Profits Tax (Large companies)

Corporation tax fall

Tax relief for ‘micro-entrepreneurs’

Business rates drop

Stamp duty on commercial property

Indirect taxes mixed

Class 2 NICs

Capital gains tax cut

Entrepreneur’s relief for investment in small companies

Chancellor silent on entrepreneur’s relief restriction for contractor companies

Lifetime ISA of £4,000 a year for the under 40s.

Personal allowance and tax threshold up next year

Author’s note

 

Loans to participators

 

From 6 April 2016, the charge for a loan to a participator will increase from its current rate of 25% to a new rate of 32.5%.  A participator is typically a shareholder or director of a company with five or fewer owners.  Directors of a one-person or ‘contractor company’ and family owned business will usually be participators.

 

A full summary of the rules can be read here in the article about overdrawn director’s loan accounts.  In brief, where a contractor has not retained sufficient funds in the company at the year end to cover corporation tax, it will be a requirement to lend money as a director.  This loan gives rise to a tax charge.

 

Company funds are usually represented by the company bank account, however amounts owed from clients and equipment and other assets brought into the business can also be used as a buffer.

 

If the bank account is brought back into balance in future years, the charge can be repaid by HMRC.  However there is a cash flow drawback and an administrative burden of borrowing money from the company.

 

Termination payments

 

Payments on termination of an employment contract receive preferential tax treatment, provided the payments are not an entitlement under the employment contract.  Under current legislation a termination payment is not subject to employer’s national insurance and the first £30,000 will not be subject to income tax in the hands of the employee.

 

From 6 April 2018, many termination payments over £30,000 will be subject to employer’s National Insurance.

 

This measure has the purpose of an anti-avoidance provision.

 

Diverted Profits Tax (Large companies)

 

A series of new rules are scheduled to be introduced to bring profits derived from the UK into the charge of UK corporation tax.  The measures are aimed at companies with profits of over £5 million.

 

The rules will have most impact on multi-national organisations with that particular scope to structure finances so group profits are taxed in jurisdictions with lower than average rates.

 

For most companies, the deduction from profits chargeable to corporation tax for interest payments will be restricted to 30% of UK income.

 

Only 50% of current year profits can be reduced by losses brought forward from previous years.

 

The tightening of rules on withholding tax for royalty payments and other measures will also be presented.

 

Corporation tax fall

 

Following previous announcements, the corporation tax, which is currently 20%, was due to fall to 19% in April 2017 and to 18% in April 2020.  The Chancellor announced that the rate will now be reduced further to 16% in 2020.

 

Tax relief for ‘micro-entrepreneurs’

 

Traders and landlords with less than £1,000 will not need to declare this income on a Tax Return.  The income will be tax free.  This will particularly benefit vendors with a side-line on websites such as E-Bay and AirBnB.  Traders bringing in more than £1,000 income can deduct the allowance from their income profits, instead of actual expenses.  A total of £2,000 can be exempted from tax, one allowance for property income and the other for trading.

 

Business rates drop

 

From April 2017, small business rate relief will be increase.  The relief currently exempts businesses with a rateable value of £6,000, however this is set to increase to £12,000 from next year.  The higher rate threshold will also increase at the same time from £18,000 to £51,000.

 

Stamp duty on commercial property

 

With effect from midnight, the chancellor has brought the stamp duty system for commercial property in line with that for residential property.  The tiered system will mean that no stamp duty is payable on a property worth £150,000 or less, 2% is paid on consideration between £150,000 and £250,000 and 5% is levied on the value of the property which exceeds £250,000.

 

With the stated aim of helping “small firms”, the new duty will benefit all but purchasers of the highest value property.

 

Indirect taxes mixed

 

  • Levy on sugary drinks
  • Fuel duty freeze (despite lower petrol prices on account of the recent oil glut.)
  • Tobacco duty rise.
  • Freeze on beer, cider, whisky and other spirits duty with other alcohol taxes rising.

 

Class 2 NICs

 

Class 2 is a flat rate of national insurance which is payable by sole traders and partners.  The contribution secures a year towards the number required to qualify for a basic state pension.  This tax will now be abolished in 2018.  A social security and state pension entitlement will accrue to self-employed people via the Class 4 National Insurance.  This is payable at the same time as income tax.

 

Capital gains tax cut

 

With effect from 6 April 2016, the basic rate of capital gains tax will be cut from 18% to 10% and the higher rate of capital gains tax will be cut from 28% to 20%.

 

The rate at which an individual pays capital gains tax depends on their total income.  Gains below the annual allowance are not taxable.  Taxable gains are added to an individual’s yearly income.  To the extent that total income and gains are above the higher rate tax threshold, gains are taxed at the higher rate.  Otherwise gains are taxed at the basic rate.

 

Gains made on residential property will continue to be charged at the existing rate of 18% basic and 28% higher rate tax.

 

Entrepreneur’s relief for investment in small companies

 

Entrepreneur’s relief will reduce capital gains tax for the subscription of shares in an unlisted company and held for the longer term.  The new rules will apply to any purchase in new shares made from tomorrow.  The requirement will be for the shares to be held for at least three years from 6 April 2016 or date of purchase, whichever date is the later.

 

In effect the rate of tax will be 10% and subject to a life time limit of £10 million.  The new rules extend relief currently available for shares purchased under the enterprise investment scheme.

 

Chancellor silent on entrepreneur’s relief restriction for contractor companies

 

The government had consulted on the abolition of entrepreneur’s relief on disposal of a business.  However, there were no announcements in the Budget about this relief being withdrawn.

 

There remains an opportunity for company owners to accumulate profits in the company and withdraw this on eventual disposal.  The accumulated funds in the business, usually represented by monies in the bank account, can be withdrawn as capital on eventual disposal.  The implication is that the funds will be taxed at just 10%, rather than the much higher rates for dividends or salary.

 

Nonetheless, holding funds in a company in order to save tax carries the risk that the rules about entrepreneur’s relief will be scrapped.

 

Lifetime ISA of £4,000 a year for the under 40s

 

From April 2017, the government will introduce a new ISA.  Savers who are under 40 on 5 April 2017, will be able to contribute up to £4,000 a year into an ISA.  For every £4 contributed by the taxpayer, the government will add £1 to the ISA account.  The government contributions will continue until the ISA holder reaches 50.

 

Some or all of the capital can be invested in an ISA for purchasing a property after just one year.  However the property must be the first home owned by the taxpayer and have a value of £450,000 or less.

 

Alternatively, savers can wait until 60 to use the capital as pension income.  Unlike pensions however there is no tax to pay on withdrawing the funds.  The tax relief on investment is equal to the current basic rate of tax.  To this extent the new ISAs will be more attractive to basic rate taxpayers.

 

If the ISA fund is not used to buy a home or for a pension on reaching 60, any withdrawals would be subject to a 5% charge and loss of the government bonus.  The measure is intended to assist young people saving towards a deposit on their first property.

From 6 April 2017, all savers will be able to contribute up to £20,000 a year into their ISA.

 

Personal allowance and tax threshold up next year

 

The Chancellor announced an increase in the personal allowance from 6 April 2017 to £11,500.  The higher rate tax threshold will also increase in 2017-18 to £45,000.

 

Author’s note

 

The Budget introduced some expensive tax breaks, with a particular focus on easing the burden for small business.  However, with a stated policy of national deficit reduction, it remains to be seen whether this trend of fiscal policy can be upheld.

Summer Budget impact on Contractor companies

Published: 05 Aug 2015

Updated: 05 Aug 2015

 

Written by

 

A new dividend tax rate was announced on 8 July 2015 in the Chancellor’s Budget.  The implication is that no tax will be payable on the first £5,000 of dividends.  Thereafter, income tax will be charged on dividends at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional tax payers.

 

The implications for Contractors have been summarised in the article on 2016-17 Contractor companies.  The introduction of the new dividend tax will significantly reduce any tax savings currently enjoyed by operating via a company.  From 6 April 2016, contractors will probably pay more income tax on dividends (in addition to the corporation tax.)

 

The saving in national insurance (NI) will remain. However the NI saving of being a company may marginally outweigh the extra income tax (when compared with being a sole trader.)  As a broad measure, once profits exceed £65,000, if all profits are withdrawn as dividends there will no longer be an overall tax benefit to being a company.

 

Advantages of continuing via a company

 

  • Unlike employees, businesses can register for VAT. Particularly for flat rate scheme users, VAT registration is a considerable tax benefit, and unchanged by the Budget.
  • The paymaster will save in employer’s national insurance compared with hiring a contractor as an employee.  This is a considerable saving equal to 13.8% on earnings (above about £8,000 a year.)  There may be other non-tax benefits to the contract arrangement.
  • Paying a shareholder on a lower rate of tax (such as a spouse) will continue to have a tax benefit.

 

Outlook over the next five years

 

  • Corporation tax is reducing to 19% in 2017 and to 18% in 2020. This will reduce the overall tax payable by company owners compared with employees and sole traders.
  • Tax rules change frequently. This guidance applies to the 2016-17 tax year.

 

Tax planning

 

  • The new rules take effect on 6 April 2016. Therefore, the tax benefit of having a company up to this point will remain.
  • Consider taking as much dividend as possible before 6 April 2016.
  • Consider dissolving the company and withdrawing accumulated profits as capital gain on disposal of the business.

 

Dissolving the company

 

It is possible to extend an accounting period up to 18 months.  Accounting costs could be saved by extending the final period of account.

 

There is also the option of extracting some accumulated profit as capital on dissolving the company.  Up to £25,000 can be withdrawn without a requirement to involve an insolvency practitioner.

Autumn statement 2015

Published: 26 Nov 2015

Updated: 26 Nov 2015

 

Written by

 

A round-up of the Chancellor’s Autumn Statement made yesterday:

 

  • From 1 April 2016, a stamp duty land tax rate of 3% will be introduced on the second property a person owns. This would include secondary residences and buy-to-let investments. The rate will not apply to property developer using a company to make a purchase.
  • From 2019, any capital gains on disposal of a property will need to be reported within 30 days of the completion date.
  • The Small business rate relief has been extended for a further year.
  • The state pension will increase to £119.30 a week from April 2016.
  • There were no announcements about the leaked proposal for Personal Service Companies.
  • ‘Help to Buy’ and Shared Ownership’ schemes were outlined.
  • A digital tax account which is schedule to be introduced by 2020 is intended to replace the existing Tax Return system.

2016/17. Contractor companies

Published: 09 Jul 2015

Updated: 10 Jul 2015

 

Written by

 

Yesterday’s Budget announcement Budget on the taxation of dividends has significant tax implications for company owners.

 

The current system for contractors

 

Currently, contractors providing their services via a company are liable to corporation tax on profits.  To the extent that dividends increase total income into higher rates of tax there is additional tax to pay.

 

In a typical scenario where a person has little or no income from outside the company, it is tax efficient to pay a salary up to the national insurance threshold.  This is £8,060 for 2015/16.  Provided the director has no other income, the salary results in no income tax and is deducted from corporation tax profits.  The taxpayer is effectively in the same position as an employee or sole trader who can also have income up to the personal allowance (of £10,600 for 2014/15) tax free.

 

The remainder of profits are treated as dividends.  The basic rate tax threshold is £31,785 for 2015/16.  Given the first £8,060 is paid in salary, the most net dividend that can be paid to an individual without making that person a higher rate taxpayer is £30,892 in 2015/16.

 

In a typical scenario a company owner will receive a salary, so that the first £8,000 of profits are effectively tax free, provided there is no other income, the next £30,000 or so of profits taken out of the company also result in no income tax.  To the extent that dividends increase total income into higher rate of tax an effective rate of 25% is payable. Since dividends are paid out of after tax profits, for a higher rate taxpayer, the combined effect of corporation tax (20%) and income tax (80% of 25%) is 40%.

 

The new regime

 

From April 2016, the tax payable by a contractor will likely increase.  Profits will be calculated after deduction of director’s salary and corporation tax will be applied to profits.

 

Any contractor, with personal allowance fully used and, with a dividend of more than £5,000 will be paying more tax than before.

 

In total, transfers from the company bank account to the director’s personal bank account of more than £13,060 (in salary and dividend) will result in more tax.  In 2016/17 a person can receive total income of £43,000 before being a higher rate taxpayer.  Therefore, a contractor will be taxed at 7.5% on income between £13,060 and £43,000.

 

In 2016/17, a shareholder with dividends of £34,940 (and salary of £8,060) will be taxed at 7.5% on £29,940 of dividends.  An increase in tax of approximately £2,246, compared with the same situation in 2015/16.

 

The national insurance rates are scheduled to alter in line with the income tax rates.  For the purposes of example, I will base 2016/17 rates on the 2015/16 levels.  An employee with earnings of £43,000 a year would pay approximately £4,200 a year in national insurance.  A self-employed person with £43,000 profit, would pay approximately £3,150 a year in national insurance.

 

There will still be a tax benefit for a basic rate taxpayer from using a company, although significantly reduced from April 2016.

 

For self-employed individuals, the increase in accounting costs only justify the saving in national insurance when income reaches about £15,000 to £20,000.  For a person self-employed, with profits between £15,000 and £43,000 there is still tax efficiency achieved by operating via a company.

 

For a higher rate taxpayer, the new dividend rate is 32.5% compared with 25% previously.  If all company profits are taken as dividend, the combined income tax and corporation tax rate for a higher rate taxpayer is 20% plus (80% of 32.5%), or 46%.  This is higher than the income tax and national insurance paid by higher rate taxpayers who are either employed, sole traders or partners, where the marginal rate is effectively 42%, i.e. 40% income tax and 2% national insurance.

 

In the example above an employee on £43,000 would save £1,954 (i.e. £4,200 less £2,246) by providing services via a company.  A sole trader would save £904 providing services through a company.  The extra 4% payable by higher rate taxpayers will gradually erode this tax advantage.  A sole trader would be no better off using a company when total income reaches £65,600, and thereafter worse off.  This calculation compares saving in national insurance with increase in income tax only.

 

The comparison with an employee is less relevant since an individual who would be employed ‘but for’ the company should be taxed under the old ‘IR35’ rules.  However, for illustration purposes only, an employee may need to earn as much as £91,850 a year to be no worse off than if operating via a company.

 

Notwithstanding, there are other tax benefits to the corporate structure.  An employer saves considerable national insurance by using contactor.  Employer’s national insurance is currently 13.8% on earnings over the primary threshold of approximately £8,000 a year.  The flat rate scheme will remain available to sole traders and company owners with total turnover of less than £150,000.  A considerable potential tax advantage over employees who cannot be VAT registered.

 

Moreover, there is some respite for contractors in the form of a drop in corporation tax, falling to 19% in 2017 and 18% in 2020.  This saving in corporation tax from 2017/18 and thereafter will help to mitigate the tax increase explained above.

 

A suitable tax plan is to consider withdrawing dividends prior to 5 April 2016.  The following article outlines other methods for withdrawing company profits.  A further consideration may be to revert to employment which has a number of advantages compared with being self-employed.