How did you choose the structure of your business? For many business owners, the soft factors like limited liability or the amount of admin are all well and good but, really, it comes down to cash.
For a number of years, owners of Limited Companies have simply paid less tax than Sole Traders or Partnerships. But has the Summer Budget 2015 changed that for good?
At the moment, many business owners pay themselves a small salary to use up the tax-free personal allowance and take the rest of the profits as a dividend. If you’re a basic rate taxpayer (ie you earn less than £42,385), these dividends are tax-free. If you earn more than that, the dividends up to £42,385 remain tax-free but you pay tax on any extra dividends.
The key saving, though, is in National Insurance (NI) – while Limited Company business owners pay no NI on dividends, Sole Traders pay 9% NI on their profits up to £42,385 and then 2% on any extra profits.
This will all change from next April, when only the first £5,000 of dividends will be tax-free. After that, there’ll be tax at the following rates:
- Basic rate tax payer – 7.5%
- Higher rate tax payer – 32.5%
- Additional rate tax payer – 38.1%
This is quite an increase – it’s 7.5% extra at all levels.
Corporation Tax is being reduced by 1% but, overall, this could be a big tax cost to small business owners.
For most, it won’t make a Limited Company pay more tax than a Sole Trader, but it will certainly narrow the gap. Therefore, it’s worth a chat with your accountant.
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Added by Jon Davies
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