The new Dividend Tax came in on 6th April, with individuals only able to take up to £5,000 in dividends before the tax kicks in at 7.5%, 32.5% or 38.1% depending upon your tax band.
This has left me wondering whether or not it’s still worthwhile operating as a limited company; so I thought I’d work out a number of examples to see just what the impact really is.
The table below shows the total tax bill (Corporation & Income Tax combined) for one-person companies with profits of £25,000, £50,000, and £100,000. The calculations assume that the business owner draws a salary from this profit equal to the NIC primary threshold (£8,060 for both years), and that all post-tax profits are paid as dividends, with all the resulting tax figures being rounded to the nearest £100.
Table 1. Total tax bills for a one-person company
Combined tax bill
Profit (£) 2015/16 (£) 2016/17 Increase (decrease) (£)
25,000 3,388 4,019 633
50,000 8,800 10,300 1,500
100,000 28,800 33,000 4,200
As you can see from Table 1, small companies face substantial increases in their total tax bills as a result of the Dividend Tax. The percentage increase in the total tax bill ranges from 15% to 19%.
However, if we compare tax bills for a two-person company, where profits are divided equally, the total tax bill will also be higher in 2016/17 in the higher profit examples, but will not change at the modest profit of £25k. This is because the dividends payable for each person are within their £5,000 zero rate allowance.
Table 2. Total tax bills for a two-person company
Combined tax bill
Profit (£) 2015/16 (£) 2016/17 Increase (decrease) (£)
25,000 1,760 1,760 –
50,000 6,800 7,600 1,800
100,000 17,600 20,600 3,000
So, given the tax rises in most of the above scenarios, does it still make sense to operate as a limited company? The quick answer is yes, but only if profits are likely to be below £30k.
Tax differences between a single-person company and being self-employed
Table 3 below shows the tax differences if you switch from being a sole trader to your own one-man company and table 4 below, shows the tax savings if your business is a two person partnership.
Table 3. Tax savings for a single-person company v self-employment
Profit (£) 2015/16 (£) 2016/17
25,000 2,880 1,588
50,000 4,000 2,300
100,000 5,000 20,700
Table 4. Tax savings for a two-person company v a self-employed partnership
Profit (£) 2015/16 (£) 2016/17
25,000 1,780 1,780
50,000 2,300 1,300
100,000 8,000 4,600
What conclusions can we draw?
In essence there are three conclusions we can draw from the four tables above:
- Firstly, tax bills will rise for small companies, whatever their level of profit and the owners of those businesses will need to start setting more money aside. The rise will vary according to circumstances, but on average tax bills in 2016/17 will be around 15% higher than in the previous year.
- Secondly, there is still a clear tax advantage for businesses to operate as limited companies, provided that profits are below £30k.
- Finally, there is no doubt that whilst the overall tax savings may have reduced, it still makes sense for small businesses to operate via companies. Not only are their clear savings in tax, limited companies have other advantages, such as protecting your personal assets from creditors.
The heady rush for small businesses to incorporate to save tax, evidenced in recent years is likely to continue, albeit at a more pedestrian pace than in the past.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.