New dividend tax rules are now in force but it is still the widely held view that incorporation and corporate tax regime is better than sole trade – is this true?

To remind ourselves, the new rules introduced a £5,000 dividend allowance (which uses part of an individual’s tax band), removes the notional tax credit, and introduces the below new tax rates applicable specifically to dividends:

  • 5% on dividend income within the basic rate band
  • 5% on dividend income within the higher rate band
  • 1% on dividend income within the additional rate band

The move is targeting smaller businesses in a bid to discourage tax-motivated incorporations. But, the changes effect all shareholder and investors in receipt of dividends.

In the past it has been beneficial to incorporate small one-man band businesses at relatively low profit levels.  Following the above changes it has been assumed that it would still be effective for businesses with higher levels of profit and less so for businesses with smaller profits. But, what is the actual position when you run a side by side comparison with a sole trader?

You can see below that smaller savings are achieved at lower profit levels. I.e. at £30,000 only £800 is saved, under the old rules this was £1,500.  At higher profit levels the saving is greater i.e. at £55,000 a saving of £2,500 is achieved. Although much small than under the old rules where it was more like £3,500.  However, the sting in the tail is at higher profits i.e. £60,000 and beyond the trend reverses and they savings shrink to the point, at £145,000 profits, more tax is payable by a company/director than a sole trader.

As a result, sole traders need to carefully consider their expected profits in deciding whether to incorporate and if profits are likely to increase. You may be better off staying as a sole trader.  This is especially the case when some of the other benefits of incorporating have been removed such as the sale of the business into a Company attracting 10% entrepreneurs’ relief (ER) (removed in Dec 2014 and now subject to CGT rates of 18/28%) goodwill created on a sale that could be later amortised and set off against profits the Company made (removed in July 2015).

Christian Elmes, Partner

Christian Elmes trained at PwC and qualified as a chartered accountant in 1999, before moving to Morgan Stanley (2000-2002) as Associate in the Investment Banking Division (IBD).

He was appointed Director of Finance, Teather & Greenwood Investment Management in 2002 and moved with the Tax Efficient Solutions team to Smith & Williamson in 2004, becoming Deputy head of the department. He left to co-found Enterprise in 2011.

Over the last ten years, Christian has been responsible for developing a number of tax efficient products, particularly Enterprise Investment Schemes. He is able to lead on tax efficient product development from inception through to completion, because of his financial and tax background and commercial experience.

Christian is competent across a broad range of sectors including, leisure and hospitality, media, property and renewable energy.

Christian is a non-executive board member to a number of leisure and hospitality companies, Casper & Cole Ltd, Wright & Bell Ltd, Albion & East Ltd, Camm & Hooper Ltd and Darwin & Wallace Ltd.

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