Spring Budget 2017 - The incorporation jigsaw
In considering whether to be self employed or run a business through a company there are lots of factors to consider. It is of course important to consider commercial questions; limited liability, regulation etc. but also the tax and National Insurance rates and how profits will be taken out of the business.There are already a myriad of factors that may sway the decision either way; the likely profit level vs cash extraction requirements, admission to partnership vs the ability to grant share options, personal tax rates vs corporation tax rates and flexible methods of extraction, and the list goes on.
Historically one of the key advantages of having your own company was that you could control how much you take out and in what form. Generally dividends are considered to be a very tax efficient form of extraction, despite an increase in the rates of tax applicable to dividends effective from 6 April 2016. From the same date a 0% band was introduced in relation to the first £5,000 of dividend income.
Phillip Hammond has now cut this to a much lower band of £2,000 but with effect from 6 April 2018. The rationale for this is to prevent shareholder directors who are perceived as being in receipt of higher reward from receiving an unfair advantage. If you hold shares in your own company and have the ability to vote dividends you may want to consider ensuring that you use your full £5,000 0% band in 2016/17 and 2017/18 before the reduction takes effect. It could be particularly worthwhile if there are several shareholders involved.
If the change in the zero rate dividend band was not enough to add to the many pieces of our jigsaw, the ability to see the complete picture is hampered further by forthcoming changes in National Insurance.
We were already aware that Class 2 National Insurance, a flat-rate charge on the self-employed, is to be abolished from April 2018. A vote in favour for self employment perhaps. However, it has now been announced that the main rate of Class 4 National Insurance Contributions (also paid by the self-employed), will increase from 9% to 10% in April 2018, and to 11% in April 2019. Phillip Hammond has stated that this increase is required to reduce the gap in rates paid by the self-employed and employees. In addition it reflects the introduction of the new State Pension to which the self-employed will have the same access. Some might suggest this makes national insurance look even more like another form of taxation. Whatever the view, it is yet another variable to consider.
The key to finding your way through this complex commercial and arithmetical maze is to devote some time to sitting with your adviser and mapping out your financial and strategic aims. There is always an answer, you just have to find that last piece before it all falls into place.
If you would like further information, please contact Tax Director, Jacqui Gudgion or your usual Mercer & Hole contact.
Date: 9th March, 2017
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