We have written numerous articles on this subject in the past but just recently new rules and changes in tax legislation, particularly Dividend Tax (DT) and National Insurance (NI), have really impacted on the tax efficiency of limited companies.
In the past setting up a limited company was an easy way of saving tax and NI. However, a succession of changes since 2016 has impacted greatly on the tax efficiency. It all started with the dividend taxation reform in 2016. Before the 2016 reform dividends were treated as being received net of a notional tax credits which were deductible in the self-assessment tax computation. Therefore, a dividend that that fell into the basic rate band was not subject to any tax. After the reform all dividends were subject to tax at either 0%, 7.5%, 32.5% and 38.1% and these rates corresponding to dividend allowance, basic rate, higher rate and additional rate. Up until the 2018/2019 tax year the first £5,000 of dividends were tax free but it was then cut to £2,000.
Additionally, as announced by the Chancellor in September last year, the income tax rate in respect of dividends has increased by 1.25% from 6 April 2022 to help fund health and social care. The dividend trust rate of income tax is also increasing in line with the additional rate, increasing from 38.1% to 39.35%.
So, as you can see the tax efficiency for limited companies since 2016 has been eroded by government legislation. So, is it worth setting up a limited company and will it save me tax? This can only be answered on a case-by-case basis but we can offer advice and point out the things you should consider.
- The first thing to consider is the 2023/24 increases in Corporation Tax (CT) which is detailed below:
|Category||Financial Year 2022/23||Financial Year 2023/24|
|Small Profits Rate||N/A||19%|
As a result of the CT rate increase, the full rate of 25% will be applicable to businesses making profits of over £250,000. Businesses earning profits between £50,000 to £250,000 will be able to claim marginal relief. Marginal Relief provides a gradual increase in CT rate between the small profits rate and the main rate. So, where a Company’s profits in a financial year exceed the lower threshold but do not exceed the upper threshold the company will pay CT between 19% and 25% on a proportional basis.
- There are tax efficiencies that can be introduced to help counter the impact of the CT hike.
- Reducing dividends and retaining more profits in the company. Dividends to be taken at a later year when profits are lower or post retirement.
- The Company making its own investments which would increase the distributable profits in the future and reduce the current tax burden.
- Making Pension Contributions which would reduce CT liability and provide revenue for post-retirement.
- The director should consider a spouse or civil partner becoming a director. Paying yourself and your spouse or civil partner a salary will reduce CT and enjoy the benefit of 2 personal allowances and dividend allowances and potentially reducing income subject to the higher rate income tax band.
- What is important is that you calculate the most tax efficient way of paying salaries and dividends to director shareholders. Making sure that you reduce your tax liability by the maximum that is possible depending on individual income requirements. Tax Compute can certainly help businesses with all aspects of tax planning.
Contact Tax Compute Accountants to get more advice on setting up a limited company. The first consultation is free and you can do it by zoom or a face to face at either our Hammersmith or Cheltenham office.
13 Royal Crescent,
Tel: 01242 241998
Tel: 020 7118 4422