Many limited companies in the UK have only one director, who is also the only shareholder of that company, and does not employ anyone else. Today’s budget announced two measures which will increase the tax bill for these companies and their directors.
Employment Allowance changes
The Employment Allowance, which currently allows most employers to reduce their employer’s National Insurance bills by £2,000 a year, is to be withdrawn from companies where the director is the sole employee, as from April 2016.
For other employers, however, the Employment Allowance will increase to £3,000 from April 2016.
Amendments to dividend tax regime
At the moment, if you are a basic rate taxpayer, you pay no additional tax on dividend income, because dividends are currently treated as paid after a 10% tax credit has been applied. Many sole director/shareholders choose to have the company reward them with a mixture of salary and dividends in order to take advantage of this.
The dividend tax regime is changing from April 2016: the 10% tax credit will be replaced by a £5,000 dividend income allowance. Any dividend income over that level will be subject to income tax at the following rates:
- 5% for basic rate taxpayers
- 5% for higher rate taxpayers
- 1% for additional rate taxpayers
This, particularly when coupled with the withdrawal of Employment Allowance for one-person limited companies, could result in significant increases to tax bills when the company and its director are considered together. The budget report specifically says that one aim of the changes to the dividend tax regime is to reduce so-called “Tax Motivated Incorporation” in order to “start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities”.