Profit of £14,230 or below? Might be more tax efficient not to incorporate.

Wed 08 Mar 2017

The Chancellor’s announcements in his Spring Budget will result in most individuals paying more tax on dividends and many self-employed earners paying higher National Insurance Contributions (“NIC”).

Specifically there will be a reduction in the £5,000 dividend allowance to £2,000 from 6 April 2018 along with a 1% increase (from 9% to 10%) in the main rate of Class 4 NIC when Class 2 NIC is abolished in April 2018. This will be followed by a further 1% increase in the main rate of Class 4 NIC in April 2019 to 11%.

So what does this mean for small business owners and entrepreneurs? Is it now more or less tax efficient to run a business as a self-employed individual or in partnership as opposed to through a company? Will the increase in self-employed NIC without all the benefits enjoyed by employees result in more individuals seeking employment positions or indeed ‘worker’ status as opposed to working as self-employed contractors pushing up employment costs for businesses?

For those with profits of up to £14,230 per year, the answer is that running the business through a corporate vehicle is likely to be less tax efficient. Prior to these changes, £13,350 would generally have been considered to be the tipping point in the coming tax year. As such, this Budget has made it less attractive to incorporate which is confusing as this direction of travel has been encouraged by the Chancellor through the cut in corporation tax rates.

Of course, there are other factors to consider when deciding whether to incorporate and the numbers above do not include the increased administration burden of running a company, nor any professional costs of doing so which further discourage incorporation at these levels.

This increase in NIC costs could result in further employment status cases brought to the Employment Tribunal, with self-employed individuals now claiming ‘workers rights’ particularly entitlement to national minimum/living wage and holiday pay. This is similar to recent cases involving the ‘gig economy’ for the likes of Uber, Deliveroo etc. This is an unsurprising change as worker status is often considered an area of contention with employment being the long standing preference by the government and HMRC.

What was not addressed in the Chancellor’s speech was the impact the reduction in the dividend allowance will have on those private individuals who receive dividends from investments as opposed to their own businesses. The dividend allowance cushioned the blow following the abolition of the basic rate tax credit that was attached to all dividends in April 2016 when it was replaced with a 7.5% tax basic rate charge. These individuals will see their annual tax charge increase by £225 on the £3,000 of dividends that will now be subject to tax at 7.5%.

For more information please contact Zoe Peck zoe.peck@mazars.co.uk, Paul Barham paul.barham@mazars.co.uk or Vaneeta Khurana Vaneeta.khurana@mazars.co.uk