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Summer 2004 Newsletter

Still Good Company

Gordon Brown promised last December to do something about the large tax savings enjoyed by the owner-managers of small companies over their unincorporated counterparts. It was possible for a business with income of about £15,000 to pay no tax at all, and that was too good to last. A sole trader would pay about £2,700 in tax and NIC on the same level of income. So the Budget introduced a new, complicated calculation to make sure that companies pay corporation tax at no less than 19% on profits that are paid out as dividends, and that bumps the tax on that very small company up from nil to about £1,600. That's quite a hike.

Even so, it's still better - for the moment - to be a small company than a sole trade or a partnership of equivalent size. The tax savings have been reduced, but they are still there - on profits of £35,000, you pay about £3,000 less as a company, and at £45,000 it's nearly £4,000 less, even after this Budget. So the Chancellor hasn't - as some people said he had - tricked people into forming companies and then hit them for more tax than they would have been paying before.

There has apparently been a drop in the number of companies being formed against last year's figures. This may reflect uncertainty over the effect of the Budget changes, or worry that they aren't the last word - the Revenue have said that they are keeping the issue under review, and they must see that substantial savings are still there. At least it seems that companies will have one more year of low taxes to enjoy, and their owners will have to think about which way to jump when the Chancellor reveals the next stage of the clampdown next year.

Meanwhile, if you own a small company and you are wondering how this year's changes affect you, we will be pleased to go through the figures with you.