As you were!

We write in the moment and the world changes at record speed. Who would have thought that not only would the new prime minister last just over a month, but also that the biggest thing she did during her 42 days in office (the mini-budget) has almost all been reversed?

What hasn't changed?

The 1.25% cut in National Insurance (NI) stays in place. However, when they increased NI they also added a 1.25% increase to tax on dividends – and that hasn't been reduced.

What does this mean to you as an owner of a small Limited Company?

The tax you pay on dividends is now:

  • 8.75% for lower rate tax payers
  • 33.75% for higher rate tax payers
  • 39.35% for additional rate tax payers

Many small business owners are now looking at whether it's worth retaining the limited company status and, on the surface, the maths show that it's a very tight calculation.

You might think that an increase in Dividend Tax of 1.25% and the change in Corporation Tax up to 25% (depending on your profit) means that it's better to be a sole trader than a limited company. But there are added benefits to being a limited company beyond just how much tax you pay.

As a sole trader whatever you earn is taxable. So, if you earn £300K profit in a year, you pay income tax and national insurance on that.

As a limited company you have more flexibility in how much of that money you have to pay tax on.

With a limited company you can:

  • Add family members to the payroll (when they do some work for you) and take advantage of the ability to pay a modest tax-free salary, increasing the total household income, without additional tax
  • Give shares in the company to family members and pay a dividend to share the profits and use up dividend allowances and lower rate tax thresholds.
  • Get tax relief on employer pension contributions.
  • Decide WHEN dividend payments are made to be most advantageous from a tax perspective.
  • Leave funds in the company to reinvest net of the lower rate of corporation tax rather than being taxed on all profits as a sole trader.

In addition, the limited company provides protection for your assets.

This levels playing field and the scales are still tipped in favour of retaining limited company status. In effect, a sole trader pays tax and NI, while a limited company pays tax and a little more tax – but those payments can be managed better.

For SME owners it may seem as though they're taking all the risks, with no holiday pay, no sick pay and the owners income directly tied to the profitability of the company, but there are even more risks without the protection of that limited company status.