Since early December 2015, there’s been speculation that HMRC is proposing to tighten tax rules on companies even further in 2016 and beyond. Already from 6 April onwards, tax rates on dividends from a limited company are being increased, the underlying idea being to tax income from a limited company at similar rates as self-employed individuals, if the National Insurance is taken into consideration.
In other words, from 2016/17, there will be no income tax/NIC benefit between taking dividends from a company and trading as self-employed. Thus for many the benefits of practising as a company is taken away.
Of course, with a company there wasn’t a need to extract all the profits of a year. They could be left in, retained in the company at the lower corporate tax rates, sheltering shareholders from higher rate tax. Eventually on retirement the company could be liquidated, and the excess funds garnered as a Capital Gain, at the low Entrepreneurs Relief rate of 10%.
It is this that HMRC is now signalling its intention to remove, so all such sheltered income will then have to be taxed at normal dividend (income tax) rates, not the lower CGT rates. This means that all income generated from practice will be taxed at personal income tax rates sooner or later whether the practice operates as a sole practitioner or a company. So the company will have no longer have a point as a shelter for excess funds.
If you have a substantial amount built up in your company’s bank, you should be seriously considering joining the many similar companies liquidating before 5 April to make use of the Entrepreneurs Relief whilst it is still available.
Ring Johnny Minford on 07841 26 0000 if you want a discussion on the point of your company in 2016, and what you can do about it.