Just as we had started to get used to the new dividend tax rules, the Chancellor has made changes that impact the tax position of both the self-employed small business owner and similar businesses run through limited companies, says Rebecca Benneyworth.
Add in the promised reductions in corporation tax and you have a complex picture, varying from year-to-year over the next three years or so.
So here are the changes we know about over the next few years, looking only at those that are likely to affect decisions about business structure. This means that I am regarding the tax and NIC thresholds as frozen at 2017/18 amounts, despite the fact that we know they will rise, and in the case of the tax figures, rise fairly substantially.
Each of the sets of figures have been prepared on the following basis:
- For the sole trader, tax and NIC payable have been based on 2017/18 rates and thresholds, except for the known abolition of Class 2 NIC in 2018, and the two 1% rises in Class 4 NIC starting in April 2018
- For the company tax liability, I have assumed that a salary equal to the NIC start point (£8,164 for 2017/18 onwards) is paid, and the balance of post tax profits are distributed by way of dividend. This provides a like-for-like comparison, as the company profits are then available to spend on living expenses
- There are other factors which will bear on this decision, as indeed there are ways of reducing the tax liability in the company still further by paying interest on a loan to the company from the owner/director, but as not all businesses are in a position to take advantage of this, it has been excluded. The main issue to bear in mind is the additional costs of running the business through the limited company – mainly in administrative costs, but also potentially through issues arising in relation to business motoring.
Table 1 – for comparison – 2016/17 position... register with AccountingWEB for free to read the rest of this article.
About Rebecca Benneyworth
Rebecca trained in London with Kidsons and, on qualifying, spent some time as Chief Accountant of a manufacturing company. She now has her own small practice in Gloucestershire that comprises of owner managed businesses and small companies.
She also lectures extensively for a range of professional bodies, accountancy firms, commercial organisations and the Inland Revenue. Demand has grown for Rebecca on the lecture circuit where she is well known for her refreshing, enthusiastic and entertaining presentation style as well as having a practical and down-to-earth approach to tax.