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An image of Rutton ViccajeeThe third in a five part series in which Rutton Viccajee guides you through the upcoming changes regarding taxation of dividends

 

New dividend rules from 6 April 2016: small owner managed companies

 

The effect of paying minimum salary and taking the rest as dividends under the new rules

Assumptions: in all cases the following assumptions apply:

  • The comparisons are between a single person operating as a sole trader and a company owned by one person.  The tax, and Classes 2 and 4 NIC are included in the current year; thereafter Class 2 NIC is excluded as it will be abolished in 2016.
  • Incorporated business assumes that the taxpayer takes the most aggressive view about distribution of profits and draws a salary roughly equal to the NIC threshold (£8,000) and the balance by way of periodic dividend. It is assumed that the tax and NIC limits set for 2016 will continue through to 2020.
  • A 100% profit distribution route has been considered, which puts maximum disposable income in the hands of the taxpayer. If profits are retained in a company over and above the personal higher rate threshold, this will produce further tax savings. This way, the figures below show the “worst case scenario”.
  • These examples exclude any other differential arising from operating in the particular business structures; in particular, there will be differences in the cost of business motoring arising from the tax treatment, and the administrative costs borne by the business operating through a limited company.

 

Table 1 : Tax & NIC burden self employed to limited company 2015/16

Profit Sole trader Tax % Company Tax % in co. Saving
£20,000 £3,100 15.5% £2,400 12% £700
£30,000 £6,000 20% £4,400 14.7% £1,600
£40,000 £8,900 22.3% £6,400 16% £2,500
£50,000 £12,790 25.6% £9,063 18.1% £3,727
£75,000 £23,290 31.0% £19,063 25.4% £4,227
£100,000 £33,790 33.8% £29,063 29.1% £4,727

 

Rutton’s conclusion

Under the existing regime, incorporation starts to be significantly beneficial with profits over (say) £20,000 to £25,000.

BUT: bear in mind that

  • There are NON tax benefits to running a limited company, and many clients benefit from these;
  • The above savings are pessimistic / worst case: usually the cash benefits are higher, where at least some level of profit can stay in the company and not be taken out as dividends. This can make incorporation beneficial even below the £20,000 profit mark