Tax considerations for companies and owner managed businesses

Taxation of dividends

From 6 April 2016, the taxation of dividends is as follows:

–    there is no ‘notional tax credit’, i.e. the confusing method of grossing up the received dividend by 100/90, then providing a notional tax credit of 10% no longer applies;

–    the first £5,000 will not be subject to tax;

–    thereafter, to the extent that the dividend falls within the basic rate band, it will be taxed at 7.5%;

–    if it falls within the higher rate band, the rate is 32.5%;

–    if within the additional rate band, the rate is 38.1%.

Note, the above does not apply to dividends within ISAs and pensions.

This policy will impact on small companies owned by director-shareholders that usually take a salary up to the NI limit and dividends thereafter.  The benefits for individuals here have included being able to avoid NI and being able to defer taking income until the marginal rate is lower.  The legislation attempts to counteract this planning to some extent, but ultimately it is still usually preferable to take a small salary and the rest as dividends.

Annual Investment Allowance (AIA)

The AIA is £200,000, i.e. a reduction from the previous allowance, but more than the initially proposed £25,000.

Corporation tax

The rate of corporation tax rate is to be reduced as follows:

–    from 1 April 2017 to 19%;

–    from 1 April 2020 to 17%.

This reduction should slightly alleviate the impact of the change in taxation of dividends – and just in time for the next general election … !

NI Employment Allowance

From April 2016, where a company’s only employee is the sole director, the NI employment allowance is no longer available.  For all other businesses, the allowance is increased to £3,000 from April 2016.

This did provide a planning opportunity in the past: shareholder-directors could take a salary up to the income tax basic rate band limit and avoid employer’s NI on the amount that exceeded the NI threshhold.  Given that this has not been around for that long, it is doubtful that many implemented this planning.

Planning opportunities for owner-managed businesses/shareholder-directors

For those that provide their services through a company which they own, the way in which they remunerate themselves should be reviewed as it may not be as tax efficient to simply take a small salary and the rest as a dividend.

The following should be considered in particular:

–    If there is a director’s loan account, the director should consider charging a commercial rate of interest to obtain the benefit of the £5,000 savings band.

–    It may be best to limit dividends to £5,000.

–    Consideration should be given to other family members being shareholders, particularly spouses and children that are 18 or over and in full-time education.

–    The use of pensions should be considered, particularly given that they are far more flexible than ever before.

There is no ‘one size fits all’ solution.  It is a case of deciding on your particular circumstances and requirements, then crunching the numbers to arrive at a tax efficient and practical solution.