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Over consecutive Budgets, we have seen the chancellor limiting the tax advantage of limited companies. This Budget has effectively put a death nail in the tax efficiency of limited companies for small owner managed businesses where all profits are drawn throughout the year, leaving nothing retained in the business. The reduction in National Insurance rates for the self-employed now means that a limited company with no retained profits is less tax efficient than a partnership, self-employed individual, or limited liability partnership.
While limited companies still face tax rates of 19% on profits up to £50,000, 26.5% on profits between £50,001 and £250,000, and then 25% on all profits thereafter, the Corporation Tax and Dividend Tax environment is no longer as competitive for many small businesses.
Example: a business with one owner making profits of £100,000 (before directors’ salary)
For businesses that do not “retain” much profit annually, it’s tempting to suggest they become sole traders or standard partnerships. However, there are serious drawbacks to being self-employed, the biggest being the absence of legal separation between the business and the owner. This means the owner’s personal property and assets are at risk if a customer or finance provider has an issue with the business. Put another way, it means that you, as the business owner, increase the risk to your own home and money based on the business’s performance.
Ideally, to be in the best position you want the protection of a limited company whilst paying the tax rates of an unincorporated business. Fortunately, we have a wealth of expertise as specialists in LLP’s.
This structure combines the benefits of a limited company, where legal liability is separated from the owners, with the transparency for tax purposes, treated similarly to any other partnership by HMRC. This allows you to benefit from the self-employment tax rates and benefits as detailed above.
We would advise any business with employed staff to structure itself within a Limited Liability Structure, not as an unincorporated business. If a standard limited company no longer works, an LLP might be the solution.
Even if you’re the sole owner, there are ways to set up an LLP to handle your business’s trade. Additionally, LLPs are well-suited for succession planning, providing flexibility to bring in new business partners over time.
We have always been a big fan of LLPs, and now that the tax rules also support them, they look to be a much more generally attractive proposition in the new tax year.
Restructuring to an LLP should be done with careful planning. We recommend that you undertake an analysis with your Principal Adviser to work out what the benefits will be for you and your business.
Factors such as lending, capital value, future sale of the business, or growth plans will all play a role in working out if an LLP is best for you. While tax is important it shouldn’t be the tail that wags the dog, and your Principal Advisor can guide you through what is right for you.
In a complicated tax system, there are many aspects to consider to ensure that you get the correct advice!
Limited Companies remain very effective in cases where the business generates much more profit than the owners need to draw. The retained earnings very quickly compensate for the savings in the National Insurance tax rates enjoyed by LLPs, partnerships or sole traders. This is because generally a business that can retain profits each year has an owner that is already into the higher rate tax bands. Depending on the individual’s tax bracket and whether the company pays the marginal rate of Corporation Tax (26.5%) or the main rate (25%), keeping cash in the company or utilising it without drawing via salary or dividends saves between 20-35% on retained money.
Using some general indicative calculations, a business with £150,000 profit (excluding directors’ salary), paying a director £100,000 and retaining £16,000 of profits, will save approximately £4,700 compared to a sole trader structure.
For our clients trading via limited companies, the level of drawings is a crucial factor in planning the business structure. The next question revolves around long-term plans for extracting retained money from the company. There’s a range of options and plans available depending on your intentions and individual situation.
While officially there are three tax bands (Basic Rate, Higher Rate, and Additional Rate), due to the impact of the personal allowance, dividend allowance, and the band at which the personal allowance is gradually removed, there are effectively five to six tax bands for calculating payable tax on each level of income.
Our tax rates table gives the headline rates. But below, we’ve outlined the effective tax bandings to clarify why there are some horrible bumps in personal tax calculations!
Employee Tax Bands
Self Employed Tax Bands
Dividends Tax Bands
A reduction in CGT rates for buy-to-let property owners has been a topic of discussion with our clients for some time. The idea is that lowering the CGT rate on the sale of such properties will encourage more to come onto the market, freeing up housing stock for purchase by owner-occupiers. With the announced cut in the CGT rate on buy-to-let property from 28% to 24%, the Chancellor has potentially nudged the property market in this direction.
The reduction applies from 6 April 2024, so it doesn’t take immediate effect like some CGT changes have in the past. For anyone selling a buy-to-let property in the coming weeks, it might be worth holding off for another four weeks before exchanging contracts to be eligible for the lower tax charge.
* Please note that Capital Gains Tax is calculated based on the date of exchange, not the date of completion.
We also think it’s important to note that tax due on the sale of UK residential property is payable 60 days after completion; you can’t just wait until we do your next tax return! If you’re about to sell a property, it’s worth letting your Client Manager know ahead of time so we can keep on top of the current tax requirements. For more information on the 60 Day Capital Gains Tax reporting, please see our article here. Failure to comply with these rules will result in interest and penalties charged by HMRC.
Our initial question after the announcement of the reduction in the CGT rate for Residential Property sales was: why not go all the way to 20%? We can only presume that some clever calculations were completed in the Treasury that implied a cut all the way to 20% might flood the market with too much property, causing house prices to drop, which is never a vote winner! We shall have to wait and see what impact, if any, this tax cut has on property markets.
The VAT registration threshold, designed to help smaller businesses keep things simple, has been frozen since 2017. If it had kept up with inflation, it would now be at £108,000. Therefore, the introduction of a revised threshold of £90,000 falls significantly short of this.
After years of inflation, this adjustment might be too little, too late. There’s an argument that holding your business back solely to avoid VAT registration might be doing more harm than good. However, for businesses selling to consumers, passing this cost to customers who cannot claim it back can be a painful issue.
For those already VAT registered, it’s important to note that the deregistration limit will be £88,000 from 1 April 2024. Therefore, if your business was just above the old £85,000 threshold, you might want to review your 12-month rolling turnover to 31 March 2024 to determine if it’s time to deregister. However, we advise against making a decision without considering the forecast performance of your business to ensure you’re not frequently hopping in and out of registration.
The benefit of declaring an investment property under the “Furnished Holiday Let” rules has diminished over recent years. While not something we were predicting, the total abolition of the rules is perhaps not so surprising.
One impact of removing these rules is that properties previously held as holiday lets will no longer be able to apply “capital allowances” like a trading business, although many holiday lets didn’t utilise this extensively anyway. The biggest impact is that on sale of the property this now falls into the normal Capital Gains Tax (CGT) rules for residential property, potentially increasing CGT on the gain upon sale from 10% to 24%.
Another impact here is on pension contributions. Pension contributions made by individuals are presently capped at either £3,600 or 100% of their net relevant earnings. Currently, income derived from furnished holiday lettings is considered as part of these relevant earnings. However, from April 6, 2025, if you depend on income from a furnished holiday lettings to support obtaining tax relief for your pension contributions you may want to consider seeking professional guidance.
It seems the Chancellor gave with the Residential Property CGT tax cut but took away with this one. From our analysis, we can’t see how this change will help free up property in tourist hot spots for locals, as it instead discourages sales of such property.
The Chancellor acknowledged that the system for HMRC clawing back child benefit for “high” earners is extremely unfair and disproportionate, but he did little to really alleviate the impact on parents and carers. Instead, he proposed what sounds like a fairly invasive data collection system to change this to a “household” assessment in a couple of years’ time. For now, his stop gap is simply to raise the bar to £60,000 before charges apply and £80,000 before it is withdrawn in full.
This fails to address the imbalance and impact many have been promoting; the cost to HMRC of processing returns or chasing people not realising they need to submit a tax return just for this charge outweighs all the tax that is collected as a result.
Following the Bounce Back Loans, the government released loans in 2022 to help businesses recover post-pandemic. These loans, while remaining Government-backed like the COVID loans, were not on as favourable rates as the previous loans but still provide an interesting and accessible source of funding for some businesses.
Today’s announcement has secured that these loans will remain available for a further 2 years until March 2026. We recommend to all businesses seeking funding to consider all your options as being government-backed doesn’t mean it will tick all your required boxes.
The chancellor announced an abolition of “Non-Dom” rules, but in reality, it was for now just a change to the UK residency rules to a much more simplified format. It highlights that the way this is portrayed in the press isn’t helpful.
While “non-dom” refers to someone’s domicile (very loosely defined as where they are ‘from’ or their nationality), the change in rules is really regarding how someone coming to the UK is taxed for “residency” purposes.
Currently, there is an option for a non-UK domiciled person coming to the UK to be taxed on UK arising income, but only on non-UK income if brought into the UK or ‘remitted’ here. This is based on having been UK resident for tax purposes for no more than ‘7 out of 9 years’. Under the new rules, upon arriving in the UK, you will have 4 tax years where you are not taxed on offshore income, then from year 5 onwards your worldwide income is all reportable in the UK (with any double taxation treaties applying to reduce any UK tax by amounts already paid at source abroad, softening the blow).
Transitional rules will apply for those already in the UK when the changes apply, presumably to prevent any non-doms already in the UK from feeling pushed back out of the UK. Naturally, these transitional rules are complicated, and we are wading through the tax briefing documents to piece this together so that we can provide you with the advice you might need for planning purposes.
Want a deeper analysis of how the Budget announcements will impact you?
We will once again be hosting our exclusive post-Budget event on 21st March. This year we are joined by very special guests Bank of England and Federation of Small Businesses (FSB).
This event promises to provide clarity on how the latest Budget announcements will impact your business and gain first-hand knowledge from Bank of England on predicted interest and inflation rates, equipping you with the certainty and control you need to make decisions for the future.
Here’s what one attendee had to say about our budget event last year:
“I walked away with a much clearer understanding of what the budget means for my business and what I need to do to thrive in this climate. You are an excellent accounting firm, always going above and beyond to add value to businesses.”
Because of increased demand, we have just released additional tickets. Secure your tickets now before we sell out again!
BA (Hons) FCA
Co Managing Partner
01474 853856
josh.curties@a4g-llp.co.uk
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