New Rules for Small Company Taxation
Budget 2004: "Bad, but
not as bad as feared"
The 2004 pre-Budget prediction of National Insurance
on small company dividends never materialised. In fact, for companies
making a taxable profit of over £50,000 a year (assuming
there are no associates), there will be no change in the tax charge,
or best advice on how money is most tax efficiently taken out
of the company. Those that will be affected are companies with
annual taxable profits of less than £50,000.
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Tax Comparison >>
Up until 31 March 2004 all companies making a profit
of £10,000 pa or less paid no corporation tax and those
with profits between £10,000 and £50,000 pa paid between
0% and 19% corporation tax. With affect from 1 April 2004 that
will change for any companies extracting these profits by means
of a dividend.
The rate of corporation tax will remain unchanged
for the profits that are not distributed, however, for any profits
that are withdrawn by dividend a minimum rate of corporation tax
of 19% will apply. Compared to the basic rate of income tax of
22% and the fact that both employees and employers national insurance
is usually payable on any salary taken out of a company, dividends
remain the most tax efficient option for withdrawing funds from
the company.
For example, a company making £20,000 profit
and drawing all distributable profits out as dividends, will now
be paying £3,548 corporation tax, rather than £2,375
under the old rules. This would reduce the amount received by
the shareholders from £17,625 to £16,452 but assuming
the individual remained a basic rate tax payer, no further personal
tax would be payable. However, if instead, profit was extracted
as salary in 2004/05 employers national insurance of £1,731
would be payable together with £2,733 tax and £1,488
employees national insurance totalling £5,952 payable to
the government, leaving only £14,048 in the pocket of the
employee. If the business was channelled through self employment
status, a total of £4,441 tax, class 2 and class 4 national
insurance would be payable, resulting in a cash in pocket figure
of £15,559.
Weighing up the options available, the most tax
efficient method of trading, and withdrawing money from a business,
continues to be minimum salary with the balance as dividends.
Using the above illustration, this results in after tax extracted
funds of £17,383. This figure, calculated for 2004/5 under
the new rules, is £1,338 lower than for 2003/4 under the
old rules.
It may not be as good from 1st April 2004, but any
additional costs of operating through the corporate structure
continue to be outweighed by the tax benefits at the moment. Included
in a separate Budget release it was announced that a discussion
paper will be issued:
“to consider the issues raised by the
interaction with the tax system of definitions of income of self-employment,
and the remuneration paid to owner-managers”.
Practical Examples of our Small Company Taxation
Tax Expertise
- Calculating the UK tax liability of a company where
IR35 tax rules
are relevant.
- Advising in relation to overdrawn director's accounts
and the resultant s419 tax assessment.
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