Incorporation v self-employment

Prior to 6 April 2016, self employed traders could make overall tax and NIC savings by incorporating their business if their annual income from self-employment exceeded approximately £10,000. The saving generally arose by taking a low salary and the balance as dividends thus avoiding NIC charges.

Unfortunately, changes to the tax system from 6 April 2016 may mean that this strategy is no longer beneficial (or less beneficial) in certain circumstances. The relevant changes are to the taxation of dividends.

The starting point, where it continues to be beneficial to incorporate is largely unchanged in 2016-17 although the amount of cash saved thereafter will be less than in 2015-16 and previous years.

An unintended result of the tax changes in 2016-17 is that it is still beneficial to incorporate and adopt the low salary high dividends strategy, until profits generated exceed £143,000, at which point you will pay more tax by incorporating your business. This is due to the higher rates of dividend tax that are applied to dividends received in excess of £5,000 a year.

Does this mean that previously incorporated businesses should consider returning to a self-employed structure if their business earnings exceed this £143,000 break point?

The answer may indeed be yes, but each person’s circumstances need to be considered in some detail and professional advice should be taken before getting into disincorporation mode.

There is no doubt that the Treasury are intent on reducing the tax and NIC advantages of businesses incorporating and taking the low salary high dividend option. As the goal posts have moved, a new look at your business structure may be appropriate.