|
Capital Allowances
Small businesses can now claim tax relief in the year of purchase for 50% of the cost of plant and machinery, rather than 40%. This increased first year capital allowance is only available for a period of one year, which will end on 31 March 2005 for companies, and on 5 April 2005 for sole traders and partnerships. Medium-sized businesses remain entitled to the 40% first year allowance. |
|
To count as medium-sized, the limits for enterprises are 250 employees, turnover £22.8 million and balance sheet assets £11.4 million. If a company is part of a group, the group itself must fall within the limits.
Companies versus sole trader and partnership vehicles
|
You can still save tax and national insurance contributions by running a small business through a company rather than as a sole trader or a partnership — despite the Budget changes. Previously, a company making a profit of £15,000 paid virtually no tax, compared to nearly £3,000 in tax and national insurance contributions payable by a self-employed individual on the same level of profits. |
|
As a result of the action taken in the Budget to subject distributions from a company to a minimum of 19% corporation tax, a company with a profit of £15,000 will have to pay corporation tax of about £1,650. The plan would be to pay the director a salary of £4,745 (equal to the tax-free personal allowance), and then to pay out the balance of the profits (after allowing for corporation tax) as a dividend. So there is still a saving at this level of profit, but only about £1,300. If your company now seems more of a burden than a benefit, it could be fairly straightforward to abandon it and resume self-employment. However you should seek our advice so that we can help you make the change smoothly and avoid any unexpected tax liabilities.
|
|
At higher levels of profit, the new tax rules bite less hard, and incorporation still makes a lot of sense. A company with a profit of £35,000, out of which it pays the owner-director a salary of £4,745 and the balance as dividends, will now pay corporation tax of £5,575 compared to £4,841 for last year, an increase of £734. A self-employed individual making £35,000 would pay tax and NIC of £8,711. Therefore, at this level of profit you can still save over £3,000 by incorporating, and even more if some profits are left in the company. |
|
The Budget also made it harder to reduce the overall tax liability by paying dividends to a husband or wife who is not involved in the business. Last year the Inland Revenue started using complex anti-avoidance legislation under which dividends paid to a non-working spouse can be taxed as income of the other spouse. The Budget has closed a means of diverting income to a non-working spouse using jointly owned shares to bypass the anti-avoidance legislation. The Inland Revenue can be expected to continue to attack payments to spouses that it considers have no commercial basis.
| |
.JPG)
