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Are limited companies still tax efficient?

The change to the taxation of dividends announced last year was bad news for individuals who operate as limited companies. Until 6th April, the most tax efficient strategy was to take a small salary and the remainder as dividends as there were no NI contributions and no tax on those dividends unless you were a higher rate taxpayer.

The new 7.5% tax on dividends in excess of £5,000 has reduced the tax advantage substantially but a business with profits of £30,000 would still be about £700 better off than an equivalent unincorporated business. At £60,000 the tax advantage is about £3,500, however above that the advantage tails off and is effectively lost by businesses earning more than £130,000 per year.

This assumes that all post-tax profits are extracted from the business. If the profit is left in the company then it will not be subject to the dividend tax and can be taken when the financial position makes it more tax efficient.

If profits exceed £130,000 business owners may be tempted to disincorporate, but just because profits are that high in one year it does not necessarily mean they will be in future years so the timing of dividends can be arranged to minimise tax paid. They also need to consider whether the loss of limited liability is an issue.

For most businesses a limited company is still the best structure but for those with high profits, it is advisable that detailed profit projections are prepared before making any decisions. For further advice, please contact us.

Howell & Co has been assisting Online Profiling Ltd since 2005. They couple efficient service with good practical advice and are always extremely helpful and professional.  
Trevor DawesManaging DirectorOnline Profiling Ltd

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