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Tackling the Social Care problem - tax impacts for SME owners

So,  we have some tax increases and a proposed new tax!  Yesterday, the Government announced increases in National Insurance Contributions for employees, employers and the self-employed and an increase in the rates at which dividend income will be taxed from April 2022.  All three will increase by 1.25 percentage points from that date and from April 2023 employee’s payslips will see the NIC elements transformed into something called the “Health and Social Care Levy”.

There is an awful lot of politicking to be done before these changes come into effect but already there are some matters that owners of SMES may wish to think about over the coming months.

First, don’t panic!  The changes are over six months away and Mr Sunak announced yesterday that his Budget will be held on 27 October 2021 so let’s see what other surprises might be sprung on us then.

Next, those with limited companies need to think about their remuneration strategies.  Many may have already adopted a strategy of a low salary (at the level where employer NIC starts) with any other funds extracted as dividends if profits allow.  For them, this change is only likely to make this strategy more advantageous in that whilst dividend tax will suffer an increase in rates, salaries will suffer two increases with both Employees and Employers NIC increasing.  Those with businesses who claim Research and Development Tax Relief may wish to take the opportunity to rebalance packages given that salaries (and the associated NIC) may qualify for this valuable additional tax relief whereas dividends will not.

This last 18 months has seen businesses struggle and some of them will have relief on their owners for funding.  If the owner has loaned funds into the company, then perhaps withdrawing some of the profits by means of an interest charge on those loans should be considered.  The increase in NIC and dividend tax do not apply to interest which is taxed at the 20%, 40% and 45% rates of tax that we find on other income. Interest on such loans will be tax-deductible for the company although there is a rather cumbersome reporting process that the company needs to deal with when interest of this sort is paid. 

And what about rent?  Many owners will have adopted a strategy to own a property from which the company trades outside of the company, maybe personally or through a pension scheme.  If owned personally then are we sure that the rent being paid by the company is at current market rates? Again, rental income will not suffer any of the proposed tax increases and should be deductible against profits for Corporation Tax purposes.

Of course, mention of the word “pension” should remind us that this is a very tax-efficient form of profit extraction with, in general terms, a deduction against Company profits and no tax being changed on the individual on contributions made by the company to that individual’s scheme.

Finally, of course, owners may simply say that, faced with all of these tax changes, perhaps the better plan is to keep the money in the company.  Many are adopting that strategy at the moment or creating structures to enable that to happen.  Let’s see what Mr Sunak has got in store for that strategy on 27 October…..