It seemed that the ‘incorporation bubble’ may be about to burst. Last December the government announced that it planned to introduce measures in its spring 2004 Budget to ‘ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company’.
Detail was decidedly sketchy and many feared the imposition of an NI charge on dividends paid by small companies. In the event the government has, thankfully, chosen a rather different solution. With effect from 1 April 2004 a minimum rate of corporation tax of 19% is applied to the profits a company pays as a dividend to (non-company) shareholders, primarily individuals.
The changes only affect companies with taxable profits below £50,000. Those with profits above this level will be unaffected because they pay corporation tax at a rate of at least 19% on their profits anyway. Whether those profits are paid as a dividend or retained in the company will continue to have no bearing on the corporation tax liability.
Those companies affected will see an increase in their corporation tax liability but there will be no impact at all on an individual’s personal income tax liability when a dividend is received.
For companies with taxable profits below £50,000 it is clear that the rate of corporation tax will now differ according to whether the profits are retained or paid out as a dividend.
The current rates of corporation tax on profits up to £50,000 are as follows:
Therefore at a profit level of say £35,000 the corporation tax liability under the old regime would have been £5,938 (being £10,000 @ 0% + £25,000 @ 23.75%) which represents an overall or average rate of 16.97%. |
| Profits all paid as dividend £ |
Corporation tax old rules £ |
Corporation tax new rules £ |
Extra costs £ |
| 10,000 | 0 | 1,900 | 1,900 |
| 20,000 | 2,375 | 3,800 | 1,425 |
| 30,000 | 4,750 | 5,700 | 950 |
| 40,000 | 7,125 | 7,600 | 475 |
| 50,000 | 9,500 | 9,500 | 0 |