What the political parties’ tax policies will mean for small business clients
Which parties’ tax policies will leave your clients paying more tax on the sale of their business or on the income they take from their companies? Rebecca Cave has read all the manifestos and crunched the numbers so you don’t have to.
Imagine you have two clients, Peter and Jane, who want to know how the tax proposals contained in the main party manifestos will affect the tax they have to pay in 2020/21 and beyond.
Peter and Jane both run their businesses through their own one-person companies, and neither company is subject to IR35 or the off-payroll rules. They do not have employees. Jane is winding down ready to retire and plans to liquidate her company in 2020. Peter’s company makes a steady profit of £50,000 before deduction of his salary.
How much tax will Peter and Jane pay if the Conservative, Labour or Liberal Democrat tax policies are adopted?
Jane – CGT on retirement
Jane expects to make a gain of £200,000 when she liquidates her company. Her income in the year she retires will be covered by her annual exemption of £12,500.
The Conservative manifesto doesn’t mention changes to the rates of capital gains tax, however it does say that entrepreneurs’ relief will be “reviewed and reformed” as it is not meeting its objectives. We have assumed that this means Jane will no longer qualify for entrepreneurs’ relief (ER) on the gain realised on liquidation of her company. Jane will pay CGT at 20% (rather than the ER rate of 10%) on her entire gain after deduction of the annual exemption, which we assume will remain at £12,000.
Income and gains will be taxed at the same rates under a Labour government. However the 45% rate threshold will be reduced to £80,000 and a new 50% band will start at £125,000. The CGT annual exemption will be reduced to £1,000, and entrepreneurs’ relief will be abolished.
The Lib Dems will also tax gains at the same rates as income and abolish the annual exemption. Also all income tax rates will rise by 1%.
|Jane’s tax on gains under:||Conservatives||Labour||Lib Dems|
|CGT @ 20%/21% up to £37,500||37,600||7,500||7,875|
|[email protected]%/ 41% to £80,000/ 150,000||17,000||46,125|
|CGT at 45% to 125,000||20,250|
|CGT at 50%/46% above £125,000/ 150,000||37,000||23,000|
|Total tax due:||37,600||81,750||77,000|
|Proceeds after tax:||162,400||118,250||123,000|
Peter on annual profits
Peter’s company pays him a salary at the NI threshold of £8,632, and he takes the balance of the available cash from the company as dividends. He has no other income.
The Conservative manifesto promises to freeze the rates of income tax and NIC. The threshold for employee’s NIC is to increase £9,500 in 2020/21, but as there is no guarantee that the employers’ threshold will also increase, Peter has decided not to raise his salary in 2020.
There is a commitment to keep corporation tax at 19%, but no changes are proposed for dividend tax or the dividend allowance.
Corporation tax will be imposed at two rates in 2020/21; 19% for small companies and 21% for larger companies, but both these rates will rise over time.
The big hit for one-man companies will be taxation of dividends at the same rates as other income, with no dividend allowance. The Labour manifesto is not explicit about whether national insurance will be applied to dividends, as it says: “equalise the tax treatment of income from dividends with other income”. For these purposes we will assume dividends will remain free of NIC.
Corporation tax will rise to 20% for all companies. All income tax rates will rise by 1%, but there is no mention of the thresholds for income tax or national insurance changing.
|Peter’s profits under:||Conservatives||Labour||Lib Dems|
|(rounded to nearest £)||£||£||£|
|Company’s gross profit||50,000||50,000||50,000|
|Profit before tax||41, 368||41,368||41,368|
|Corporation tax: 19%, 21% 20%||(7,860)||(8,687)||(8,274)|
|Payable as dividends||33,508||32,681||33,094|
|Assume personal allowance: £12,500|
|Personal allowance in excess of wages||(3,868)||(3,868)||(3,868)|
|Tax at 7.5%||(2,073)|
|Tax at 20%/ 21%||(5,763)||(6,137)|
|Dividend income after tax||31,435||26,918||26,957|
|Net employment income||8,632||8,632||8,632|
|Total income after tax:||40,067||35,550||35,589|
Although Peter is not a higher rate taxpayer and certainly doesn’t earn anywhere near £80,000, he is expected to pay £4,517 more in tax under Labour, and £4,478 more under the Liberal Democrat policies.