Why company shareholders are still winners from the 2009 Pre Budget Report
There are a number of reasons why anyone running a business through a company has benefited from the 2009 Pre Budget Report changes. Here's a few: The basic rate band has been frozen but shareholders won't be caught by the NI increase if they extract dividends. As from 6 April 2010 the higher rate threshold (ie the point at which higher rate tax is payable) remains at £43,875. This may therefore catch more people within the higher rate band. The national insurance increases from 2011 mean that employees will pay 13% on income within the higher rate band. Income over this will suffer an added NIC charge at 2%. This 2% charge is uncapped. Sole traders will pay NIC at 9% on profits up to the higher rate band and then the 2% on the excess. However for company shareholders they can extract cash as dividends rather than salary. This means they'll be avoiding national insurance in any case. They'll therefore be able to extract dividends from a company of up to £43K each without paying income tax. Note that this is the gross dividends. The actual cash dividend they can extract free of income tax is around £39,500.
For a husband and wife company it's therefore possible to extract cash of around £79,000 free of income tax. Rate of corporation tax for small companies frozen at 21%.
Compared to the 40% higher rate of income tax (and the new 50% super tax rate) this looks very attractive. Companies that retain profits will see a substantial benefit in terms of reduced taxes when compared with trading in their own name. Income shifting provisions still on hold. For many husband & wife companies this was a potential worry. However they've been put on an indefinite hold so husband & wife companies can continue to extract cash as they see fit. Capital extractions.One of the big changesapplying from April 2010 is the new 50% tax rate. This applies to income though and not capital. There was concern that the rate of capital gains tax would be increased from the current 18% rate. However this has not happened and CGT remains at 18%. Company shareholders are in the enviable position of being able to accumulate cash within a company and then extract it as a capital distribution subject to capital gains tax at 18% even if it exceeds £150,000. If this was income it would trigger the new 50% income tax charge (or 42.5% if extracted as dividends), but as a capital extraction it's taxed at just 18%. In theory Entrepreneurs Relief could also be due if the company was a trading company, however in practice the Revenue would challenge such a claim in many cases on the basis that the company had 'substantial' non trading assets (ie cash in the bank). Nevertheless 18% is a lot better than 40% or 50%.
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