A five-year overview for tax if you run a small Limited Company

Following the announcement of a change in the tax-free dividend allowance in last week’s budget, our Director Chris Thomas has written an overview of how the total tax paid by Limited Companies will change over the next four tax years, using the current tax year as a starting point.

As we have seen, the rules on dividend tax are subject to change depending on the Chancellor’s spreadsheet workings, and also the very real prospect of further tax powers being devolved to Holyrood from Westminster (and the very real prospect of Scottish Independence).

To recap, the tax changes affecting limited company Directors are as follows:

2016/17 - An extra 7.5% was applied to Directors dividends at all income levels, with a tax-free Dividend Allowance of £5,000 introduced

2017/18 - The corporation tax rate falls to 19% from 20%

2018/19 - The annual tax-free Dividend Allowance reduces from £5,000 to £2,000

2019/20 - No changes announced

2020/21 - The corporation tax rate falls to 17% from 19%

The three main variables that we face in Scotland are:

  1. The threshold at which taxpayers pay the higher rate of tax at 40% will increase to £45,000 in the RoUK from the 2017/18 tax year. The threshold for Scottish taxpayers will remain at £43,000 meaning Scots could pay an extra £400 in income tax. However, as our recent post explains, the powers transferred to Holyrood to set the tax thresholds do NOT include dividend income. So, the £45,000 rate will apply to you if your salary is less than £43,000 and is topped up with dividends
  2. Since 1999, the Scottish Government has had the power to vary the rate of income tax for all taxpayers (known as the Scottish Rate of Income Tax – SRIT). To date, this power has not been used. But, there is the possibility that the income tax rate could change, particularly for higher earners
  3. The First Minister announced on 13th March her plans for a second Independence Referendum between the Autumn of 2018 and Spring 2019. Expect to see some clear signposting on tax in an Independent Scotland before the vote

So, not many variables to consider then!

The table below shows the total amount of tax that will be paid at various profit levels over the next four tax years.

The assumptions I have made are:

  • The table relates to a single Director company
  • A salary at the NIC minimum will be paid to the Director (approx. £8k per year but rising with inflation)
  • All post tax profits will be paid out as dividends, so we can see the total tax paid
  • The current rules (dividends) on the 40% threshold are subject to the RoUK threshold values, and not the Scottish ones

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You will see that

  • Taxes paid in 17/18 fall because of the cut in corporation tax to 19%
  • Tax will increase in 18/19 because of the fall in the tax-free Dividend Allowance
  • Tax reduces in 20/21 when the corporation tax rate falls to 17%
  • At all profit levels, less tax will be paid in 20/21 than it currently will in 16/17

The cynic in me would predict that the Chancellor will again change the rules on dividend tax by 20/21 to increase the tax paid. What he gives in one hand, he takes away in the other.

But, my crystal ball tells me that changing small business taxes will be high on the agenda of the UK and Scottish governments for some time to come. So, look out for many different re-writes of this article over the next few years!

If you have any more questions please don't hesitate to contact us and we will be happy to have an informal chat.