Spring Budget 2017 - Small business tax changes

UPDATE 15 MARCH 2017 - It has just been announced that the Class 4 NIC increase WON'T happen in 2018 ... this blog post will be updated to reflect this ASAP! 

Last week the Chancellor dropped some tax changes into the budget that will impact small business and no-one really saw them coming: 

  • the increase in Class 4 National Insurance for the self employed from April 2018
  • the reduction in the dividend allowance from £5k to £2k from April 2018

These coupled with the already announced scrapping of Class 2 National Insurance contributions from April 2018 and the reduction in Corporation Tax rates to 19% from April 2017 (and then to 17% from April 2020) have left many small businesses scratching their heads and wondering are they set up in the most tax efficient way and what is the right balance.

First things first  

There are lots of reasons to operate as a sole trader or a limited company and tax planning is just one of them but it is not the sole reason to choose how you run your business.  It is strongly recommended that you speak to someone about your business before you look at alter your structure to ensure that any decisions made are right for you and your business.

Trading history and future plans should also be considered along with your full tax circumstances.

When you run as a limited company there are more legal obligations that have to be fulfilled and the cost of these should be factored into your decision process, these can include (but are not limited to):

  • Incorporation costs - Companies House charge is £12 plus any fees you incur from third party help (one off fee)
  • Annual confirmation statement fee - currently £13 charge from Companies House (annual cost)
  • Business bank accounts can incur higher charges
  • Business stationery all needs to be updated
  • Differing insurance requirements
  • Increased accountancy fees as additional work is required for statutory accounts and corporation tax returns

Sole trader tax

As a sole trader for the 16/17 tax year and the 17/18 tax year you pay income tax at 20% on your profits above the personal allowance level, Class 2 NI contributions and Class 4 NI at 9% on profits above a certain level.

From April 2018, Class 2 NI is being scrapped and Class 4 NI will increase to 10%.

If you have profits of £20k then in 17/18 your tax and NI cost would be £2,913 and in 18/19 this actually falls to £2,884 .. ok, this is a tiny, tiny fall and I have triple checked these numbers but the scrapping of the Class 2 NI is a bigger saving that the 1% extra Class 4 NI. 

If you have profits of £25k then in 17/18 your tax and NI  cost would be £4,363 and in 18/19 this increases to £4,384.

Company tax

I need to explain some assumptions ...

  1. All profits are taken out of the business
  2. The profit levels below are before any salary to the owner/director
  3. There is a sole owner/director
  4. Tax planning has been done so that the salary and dividend mix is set up in a tax efficient manner

Again, for profits of £20k then in 17/18 the total tax cost (company and personal) is £2,343 and in 18/19 it is £2,565.

For profits of £25k then in 17/18 the total tax cost (company and personal) is £3.586 and in 18/19 it is £3,821.

The increase from 17/18 to 18/19 is the impact of the reduction of the tax free dividend allowance. 

Comparison

Conclusion

Historically, profits of around £25k would mean it would be more tax efficient to look at incorporating your business, with the changes that are coming in it is looking that this is falling to nearer the £20k mark.  However, as noted above, running a limited company does incur more costs and more legal requirements so you need to look at the bigger picture before you incorporate.

If you would like to talk through your own circumstances then please contact us.

Rachael Savage