Partner Rebecca Benneyworth Training Consultants
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Benneyworth’s view on business incorporation

10th Jul 2015

The Chancellor’s shock announcement about dividend taxation left lots of accountants wondering whether this signals the end of tax motivated incorporation. In response to pleas from AccountingWEB members, Rebecca Benneyworth takes an introductory look at the proposals.

In reality, incorporating to save tax has not really been a practical solution for businesses with profits of less than £40,000 for a few years now. The additional administration erodes the few hundred pounds of tax saved quite quickly, and with the abolition of Class 2 NIC next year the savings are smaller still.

Where business owners decide to do their own admin, the risk of significant fines can soon outweigh any benefits, and the CT return and Companies House filing process is not simple for small businesses to navigate unaided, although the new joint Companies House and HMRC product due to be launched very soon will help a little.

Business owners would probably save more tax by paying a partner with minimal other income to do some administrative work in the business than by incorporating.

The point at which incorporation saves enough tax to make sense is probably at around £40,000 profit. At this point, even with some additional costs for company accounts, payroll and corporation tax, there is still some saving left for the owner.

But the big question is what the effect of the change in taxation of dividends will be for these company owners?

There are a lot of assumptions that can vary, but in simple terms, if a business making £40,000 a year in profit incorporates, it saves around £2,500 in tax for the owner, assuming he or she takes a salary of just below the NIC limit and the rest of the profits by way of dividend.

From 2016, that saving will be reduced to around £600, taking into account the increased personal allowance and the abolition of Class 2 NIC. So the savings are lost – and the extra admin costs probably mean that limited company status is not worthwhile.

It is not worth increasing the salary to use up the personal allowance, as the removal of the employment allowance for one man limited companies from 2016 means that such a move would cost significant amounts of NIC.

So company owners are in for a bigger tax bill in the future.

Make sure to register for her TaxCalc-sponsored Summer Budget report to get the full analysis.

Replies (31)

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Teignmouth
By Paul Scholes
10th Jul 2015 21:58

It is so refreshing....

again, after 20 years, to be thinking of the pros & cons of incorporation without tax & NI getting in the way.

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By NH
11th Jul 2015 07:43

I think you have missed some important things

There is still a very good argument for incorporating if you are a higher rate taxpayer, I also do not agree that it has only been worth it if your profits were 40k+.

Up to now if I tell a client he can save £1000 tax even with the extra costs involved, and on top of that he will not have any POA in Jan and July, whats not to like?

Even if there was no tax advantage would you rather pay your tax in one go 9 months after Y/E or pay half before your year has even finished and the other half 4 months after y/e.

Every situation is different of course but from April there will still be some where a company will fit for tax reasons.

 

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By Manchester_man
11th Jul 2015 11:10

I couldn't agree more if I tried

NH wrote:

There is still a very good argument for incorporating if you are a higher rate taxpayer, I also do not agree that it has only been worth it if your profits were 40k+.

Up to now if I tell a client he can save £1000 tax even with the extra costs involved, and on top of that he will not have any POA in Jan and July, whats not to like?

Even if there was no tax advantage would you rather pay your tax in one go 9 months after Y/E or pay half before your year has even finished and the other half 4 months after y/e.

Every situation is different of course but from April there will still be some where a company will fit for tax reasons.

 

I couldn't agree more.

Profits of 30k = tax due of 3880
Class 4 due of 1975
Total tax and class 4 = 5855

Never nice telling a new business client that not only does he have 5855 to pay, but 2927 on top as a POA, making total payment due of 8782.50 plus another payment 6 months later of another 2927.

Clients love that. They say 'I've made 30k and in my first year I've paid over 11,500. Very bad for cash flow.

As a Ltd co, there would be CT due at 4388 assuming a salary of 8060. Then obviously there will now be additional tax on the dividend (I call it the small business surcharge). But up until now, in the above scenario of profits of 30k, most would choose the Ltd option.

Even now, whilst the saving at 30k has been squeezed to a couple of hundred quid, it is still attractive to people wanting to avoid the ridiculous payments on account system.

That's my take

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By ireallyshouldknowthisbut
11th Jul 2015 12:48

.

The tax saving (pending the legislation when I can run all the numbers properly) would appear to be about my extra fee for for a limited company vs sole trader with a full balance sheet etc, albeit they do not always want that.  

That is to say from the clients point of view tax+cost of compliance are quite balanced, then it comes down to risk, cashflow, and the upsides of a limited company in terms of deciding WHEN you take the money, plus the ER relief on winding up. 

 If its a partnership vs a company then the client would be saving tax. 

So no longer a "no brainer" to incorporate (and we do them from about £25k profit and up - the ones on small profits are often the ones who appreciate the extra few pounds) but more balanced. 

What I don't see is a rush to get OUT of a corporate structure, but there will certainly be less going in. 

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By thomas34
11th Jul 2015 18:12

Does Anyone Know

If other income (PAYE plus interest say) is less than the personal allowance, whether the £5K tax free dividends are extended to use up the shortfall or is the shortfall effectively lost?

Example - if the regime applied in 2015/2016 and a director took £671 per month (£8,052 per year) and had typically £20K in dividends, what would his tax bill be? I presume the answer must be £28,052 minus PA £10,600 minus £5K = £12,452 x 7.5% = £933.90. But commentators have suggested that it's £15K x 7.5% = £1,125.00.

We've got a while yet to worry about it but it would be good to know.

 

 

 

 

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By the_Poacher
12th Jul 2015 08:53

Useful article, thanks
I assume that once the measure has come in the Treasury will keep increasing the dividend rate until they get the result they want?

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By gbuckell
13th Jul 2015 11:03

Benefits

Regardless of your view on where the profits breakpoint was under the old regime, it is clear that it has moved up by in the region of £15k. But incorporation remains attractive. Benefits only really get hammered for very high profits and at that level it is likely that the client can benefit from a spouse with spare basic rate band and/or keeping profit inside the company.

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By The Minion
13th Jul 2015 13:22

i now feel so old

the last time i saw this kind of tax it was called investment income surcharge, and i remember doing the calcs...

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By carnmores
13th Jul 2015 15:41

and it was 98%

The Minion wrote:

the last time i saw this kind of tax it was called investment income surcharge, and i remember doing the calcs...

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By The Minion
13th Jul 2015 15:52

Ah carnmores that was

only when you added the iis to the then higher rate of 80% (and people complain now about how much tax they have to pay - huh the youth of today, they don't have a clue).

Now i feel even older :(

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By thacca
13th Jul 2015 16:20

£600 saving

The Minion wrote:

From 2016, that saving will be reduced to around £600, taking into account the increased personal allowance and the abolition of Class 2 NIC. So the savings are lost – and the extra admin costs probably mean that limited company status is not worthwhile.

 

Hello Rebecca,

Would you kindly show the calculations of that £600 saving as I cannot recreate that figure.

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By NH
13th Jul 2015 16:34

7.5% of 30k less5k

 

Hello Rebecca,

Would you kindly show the calculations of that £600 saving as I cannot recreate that figure.

[/quote]

I presume she means that now 25k is subject to 7.5%, that reduces the £2500 saving by £1875 (she did say rough figures) 

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By carnmores
13th Jul 2015 16:22

and we had to calulate it all by hand

'the taxmans taken all my dough.........'  george got it right 

even adding machines were is short supply

 

 

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By The Minion
13th Jul 2015 16:46

george?

Or was it Ray?

 

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By SE_Confused
13th Jul 2015 17:19

back to POA - now the director will have to pay it much earlier on dividends...

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By emanresu
13th Jul 2015 20:35

..

neutru wrote:

back to POA - now the director will have to pay it much earlier on dividends...

As will savers, unused to receiving gross interest.  I wonder if this has been anticipated?

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By SE_Confused
13th Jul 2015 21:13

in their greed, I believe they did anticipate this!

a bit surprising for a "pro" business budget

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By nogammonsinanundoubledgame
14th Jul 2015 12:14

Have I missed something, re class 2 NIC?

OK, we are talking trivial sums in relation to the decision, but it was my understanding that class 2 NIC collection process was being shifted into the self assessment tax return.  But that falls short of abolition.  Rebecca is now saying that class 2 is being entirely abolished.  Did I miss something?

With kind regards

Clint Westwood

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By lme
15th Jul 2015 19:28

yes you missed it

Mad though it may seem they are indeed changing the payment method just a year before totally abolishing class 2, so i believe you missed it.

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By swatt66
14th Jul 2015 22:18

Increase in tax not so bad

I have plotted the differences between 2015-16 and 2016-17 tax years for a company director on primary threshold salary. These are two not very straight tax curves which show varying differences.

At £15,000 business income they will be £69.40 better off.

At £40,000 business income they will be £1,025.46 worse off.

At £60,000 they will be only £162.43 worse off.

At £100,000 they will be £2,292.42 worse off

At £135,000 they will be only £925.69 worse off

Difficult to put the difference between two wiggly curves into words.

 

I currently say to my clients that incorporation is worth it from £15,000 business income, but that is only because my fees are very low and I am hoping they will rise to higher levels.

 

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By lme
15th Jul 2015 19:28

thank you

Thanks for a really useful article!

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By woody24
16th Jul 2015 21:50

One person company - dividend tax Apr 16 v Apr17

Could someone check if I am getting this wrong?

Where the company profit available for distribution is in the region 56k to 66k then I don’t think there should be a particularly large increase in the Apr 17 over Apr 16 tax. (Increase in the region of £400)

Say profits are 57,000 and national insurance employment allowance is available in yr to 5 Apr 16 but not available in yr to 5 Apr 17. Then drawing minimal salary each year would give:

 

 

Yr to 5 April 16

Yr to 5 April 17

Profit

57,000

57,000

Salary

10,600

8,060

Taxable

46,400

48,940

Corp tax (20%)

9,280

9,788

Available for dividend

37,120

39,152

 

 

 

Personal tax

 

 

Dividend

37,120

39,152

Tax credit (1/9th)

4,124

‘gross’ dividend

41,244

39,152

Dividend Tax Allowance

 

5,000

Taxable dividend income

41,244

34,152

Pers. Allow above salary

 

2,940 (11,000 – 8,060)

Dividend income after PA

41,244

31,212

 

 

 

Basic rate (10%) / (7.5%)

31,785 x 10%= 3,178

31,212 x 7.5% =2,341

Higher rate (32.5%)

9,459 x 32.5%=3,074

Total

 6,252

2,341

Less tax credit

-4,124

Tax on dividends

2,128

2,341

Add employee NI

305

Total personal tax & ni

2,433

2,341

 

 

 

 

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By garethgreen
17th Jul 2015 16:07

download not working

The Summer Budget Report download isn't working. I get a message saying "The requested page could not be found." Bet I still get Taxcalc contacting me, though.

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By garethgreen
17th Jul 2015 16:19

woody24, I see what you mean. Not having to gross up for the dividend tax credit means the taxable income is lower, so you potentially avoid paying an extra 20% higher rate tax on the difference. That largely offsets the extra 7.5% dividend surcharge, up to a certain level.

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By BKD
23rd Jul 2015 15:28

Woody

You need to follow your figures through. 2015/16 gives net income of £45,287 and £44,871 for 2016/17.

Not a huge difference, but the reverse of what your analysis would appear to show, based on the personal tax/NI figures only.

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By woody24
23rd Jul 2015 19:00

tax Apr 17 v tax Apr 16

Thanks BKD,

Agree - the  total tax Apr 17 is slightly higher than Apr 16 (increase 416)

Apr 16 (corp tax 9280 + personal tax 2433) = 11713

Apr 17 (corp tax 9788 + personal tax 2341) = 12129

The corp tax is higher in Apr 17 because I have assumed that Employment NI allowance will not be available.

 

 

 

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By carnmores
23rd Jul 2015 15:35

it was George Harrison

i believe 

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By Ermintrude
31st Jul 2015 10:38

None

Just following.

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By The Minion
31st Jul 2015 10:55

misquoted

@thacca

Sorry this is a bit late, i have been away.

Sorry but i didn't say what you say i said.

I think that was Ms Bennyworth

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By lme
31st Jul 2015 11:32

Insurance cost of incorporation

Interestingly, talking to an insurance agent the other day who said they were fed up with accountants not taking account of the impact on liability insurances when advising sole traders and partnerships to incorporate. The liability insurance cost can double, really significant for some clients. Not seen this mentioned by accountants - are there any other "hidden" costs of incorporating, besides slightly higher fees?

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By carnmores
31st Jul 2015 12:24

insurance agent fed up

with higher premiums ?

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