What you need to know about the new profit extraction rules

From 6 April 2018, the dividend allowance dropped to just £2,000 per person, which coincides with rise in personal allowance and the basic rate tax band, and the increase in NI thresholds. In this article, we summarise the areas that affect both company owners for 2018/19 – whether sole traders looking to incorporate, or director shareholders wanting to optimize their profit extraction.

 

SELF-EMPLOYED (SOLE TRADERS/PARTNERS)

Personal allowance & NI thresholds

This year, you won’t be asked to pay higher rate tax until you earn more than £46,350. The new personal allowance is £11,850 and the basic rate band is now £34,500.

The Class 2 NI rate for 2018/19 is now £2.95 per week, if your profits are over £6,205. The Class 4 threshold has been aligned with the Class 1 primary threshold at £8,424, with the main rate maintained at 9%, and the higher profits rate at 2%.

Considering incorporation?

If you have a profit of £25,000, you will only save around £700 in tax and NI by incorporating your business. So, the additional costs of compliance, company accounts etc would probably cancel out any savings made.

Once profits get to the £50,000 mark, however, the tax savings are better, at around £2,000. This makes the idea of incorporation much more appealing; however, due to the dividend changes it’s not a solution that works for all businesses. The tax savings continue to increase at profits above this level; however, bear in mind that where profits are more than £145,000, it then becomes more tax efficient to be a sole trader.

 

DIRECTORS AND EMPLOYEES

Personal allowance & NI thresholds

This year, you won’t pay higher rate tax until you earn more than £46,350. The new personal allowance is £11,850 and the basic rate band is now £34,500.

The primary and secondary thresholds for Class 1 have also increased to £162 per week (£8,424 per year). So, salaries paid below that level will not incur any Class 1 NI liability.

Bring in your spouse to save tax

The married couples allowance offers just £237 in tax savings, so bringing your spouse into your business is much more tax efficient overall. As well as utilising two personal allowances and basic rate bands, bringing in your spouse could enhance your company’s exemption from Class 1 NI.

Profit extraction and employment allowance

With the changes, it’s important to achieve a balance of salary and dividends. For single-owner companies, it’s now more efficient to draw a salary equal to the secondary NI threshold of £8,424. If you have other employees, then the employment allowance is available, meaning a salary equal to the personal allowance is the best option, but only by £28. So, if a spouse can be utilised, there is scope for far greater savings with the bonus of the employment allowance.

Smoothing your tax liability

Once your profits reach a certain level, the savings from being incorporated begin to reduce. There are ways to minimise your tax liability; however, the most efficient strategy would be to use excess profits to pay your pension contributions or to provide tax-exempt benefits, which would help avoid the corporation tax charge.

 

ADM Accountancy can help you make the most of your tax benefits and advise you on incorporation, contact us today on 01242 679767 or email andrew@admaccountancy.co.uk

 

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The information contained in this website is for general information purposes only. The information is provided by ADM Accountancy Services Ltd and while we endeavour to keep the information up to date and correct...
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ADM Accountancy Services Ltd
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Phone: 01242 679 767
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