Are you still better off incorporating to lower your total tax bill after the new dividend tax?
It seems the answer to lowering the total tax by incorporating a business is no longer clear cut.
After the introduction of the new dividend tax – which we looked at last month – the strategy of a director / shareholder taking a low salary and a high dividend may no longer deliver the same tax benefit as before.
Some may ask whether incorporating is still as attractive as it was before the latest tax changes, considering the burden of company reporting and compliance requirements so much broader than a sole trader’s.
Let’s look at a number of scenarios, to illustrate the total tax bill of a sole trader with a taxable profit of £50,000 and the director / shareholder of a company with same pre-tax profit before salaries of £50,000.
These are based on 2015/16 tax rate bands and rates:
(NB: These are basic examples and do not include other areas that may have a cost impact - for example the impact of auto enrolment.)
It seems the off-the-shelf solution of drawing the minimal salary and basic rate band dividend, so commonly used by accountants and expected by clients, is no longer the answer. Setting the salary at below NI threshold in a company has no advantage over a net income of a sole trader.
Following the introduction of the new dividend tax rates, it is important to consider various salary levels within the basic rate tax band to find optimal remuneration structure.
