Advice for Owner-Managed Limited Companies
As you may be aware there are a number of changes to the tax system which take effect from 6th April 2016. I have had the chance, following the budget, to take a look at these and have summarised the changes and my advice below. Capital Gains Tax Reduction The drop in rate from 18%, to 10% for basic rate earners will not be applicable to property transactions and will therefore only benefit those making a gain on shares or other investments. Small Employers Relief From 6th April companies with only a director as employee will no longer be eligible for this relief. This means that employers NI will then become payable on director’s salary. National Living Wage & Apprentices This takes effect on 1st April 2016 (not the start of the tax year) and is £7.20 for employees aged 25 and over. From 6th April employers NI is no longer payable on apprentice wages who are aged under 25, up to a new threshold. Personal Allowance The basic personal allowance for 2016/2017 will be £11,000.00 Personal Savings Allowance From 6th April 2016 the first £1,000 of interest paid on savings will be tax free for basic rate tax payers and the first £500 for higher rate tax payers. This allowance does not include ISAs the interest from which will remain tax free. Dividend Tax The deemed tax credit for dividends will be scrapped from 6th April 2016. Instead all dividends will be treated as gross. There will be a £5,000 tax free band, then dividends are will be taxed at 7.5% for basic rate tax payers (up to £43,000 for 2016/17) and 32.5% for higher rate tax payers. Bear in mind that dividends are taxed at ‘top slice’ which means that they are taxed after your other income, such as your salary. You need to look carefully at the changes and how they will impact you. There is a handy calculator on this website although I can’t vouch for its accuracy.
In some cases it is going to be more tax effective to take a larger salary than increase dividends. http://www.itcontracting.com/calculators/2016-2017-dividend-tax-increase-calculator/ What you can do Take a dividend now You can only award a dividend if your company has made enough profit to cover the dividend. It is worth awarding a dividend now that you pay later in order to take advantage of the current tax system. You can award as large a dividend as you have profits before 6th April which can then be paid at a later date. Salary versus dividends As mentioned above you should weigh up what you are paying in salary against what you are likely to pay in dividends. Remember that you can still earn £11,000 as a salary tax free (although you will have to pay both employees and, from the new tax year, employers national insurance) plus £5,000 as a tax free dividend. It may be worth looking at increasing your salary, rather than relying on dividends, and the above calculator may help you decide this. Expenses Remember to keep your expense claims up to date. This includes mileage done in your own vehicle for business purposes as well as goods you have bought for the business using your personal money. If your company owes you money for expenses then claim this before issuing a dividend. Directors Loan If your company owes you money, perhaps from when you started the company, then consider paying yourself this amount to clear the loan.
Repayment of a loan is, of course, tax free. Pension Contributions Consider making payments from the company directly into a pension. These payments can be tax deductible for the company and mean that you escape tax and NI. An annual allowance of £40,000 applies and as you need to be aged at least 55 to withdraw funds this may only be an option if you are near to this age. Further advice can be sought from an IFA and I can refer to an independent IFA if you would like me to. Summary Although there are changes which will affect the amount of tax owner managed limited companies will pay, for most people with a small limited company this will still be the cheaper option tax wise than being self-employed. Of course the final solution if you believe you will not benefit under the new tax legislation is to dis-incorporate.