Page 13 - Budget Newsletter 2021

• Transitional relief for small and medium-sized businesses, and the supporting small business scheme will be
extended for one year. This will restrict bill increases to 15% for small properties (up to a rateable value of
£20,000 or £28,000 in Greater London) and 25% for medium properties (up to a rateable value of £100,000),
subject to subsidy control limits.

The Government is also continuing to explore the arguments for and against a UK-wide Online Sales Tax (OST) and will
publish a consultation shortly. If introduced, the revenue from an OST would be used to reduce business rates for
retailers in England (and the devolved administrations will be compensated).

Dividends or Salary...

Next tax year’s changes to NICs and dividend tax rates have altered the mathematics of the choice between dividends
and salary. For shareholder/directors able to choose between the two, and not caught by the ever-tightening off-payroll
working (IR35) rules, a dividend remains the more efficient choice even if no dividend allowance is left, as the example
below shows. However, a pension contribution (within the annual allowance provisions) could avoid all immediate tax
and NIC costs. The balance will alter again from 2023/24 when the increases in corporation tax take effect for companies
with profits above £50,000.

….Or nothing at all?

For some business owners, the ultimate way to limit their tax bill is to choose to leave profits in the company rather
than draw them either as dividend or salary. With the top rate of income tax currently at 45% (46% in Scotland) - and
marginal rates potentially much higher - there is an obvious argument for allowing profits to stay within the company,
where the maximum tax rate is currently 19% and will not rise above an overall 25%.

This strategy has tax risks in terms of eligibility for business asset disposal relief and IHT business relief. There is also a
risk that reform to CGT could raise the tax rate, or even re-characterise accumulated profits as income for tax
purposes on liquidation or sale of the company. IHT reform might also have an impact. Money left in the company is
also money exposed to creditors, so professional advice should be sought before turning a business into a money box.

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