As a result of last year's Budget
■ With effect from 1 April 2000, there is to be a new 10% rate of corporation tax for profits up to £10,000. Marginal relief will apply to mean that an effective rate of 22.5% will be paid on profits between £10,000 and £50,000 at which point the 20% small companies' rate will apply to all profits.
■ Cuts in employee's National Insurance are to be introduced from 6 April 2000 and it is intended that a cut in the employer's rate to 11.9% will be introduced from April 2001.
These changes will give continuing opportunities for advisers to review the remuneration strategies of clients who are director shareholders of a private limited company. These opportunities will be especially relevant in the lead up to company year ends.
The main issues that will affect the dividend -v- salary debate are summarised below. It should be borne in mind that for companies with profits of up to £50,000 the position on dividends will change considerably from 1 April 2000 when the lower rates of corporation tax are introduced. Also, of course, future changes in National Insurance rates are intended.
First it is worthwhile to consider, as a reminder, the substantial changes of relevance that were introduced to take effect from 6 April 1999,
■ The abolition of ACT with effect from 6 April 1999
■ For accounting periods ending on or after 1 July 1999, corporation tax to be paid in four quarterly instalments for "large" companies. "Medium-sized" and "small" companies will not pay corporation tax in instalments but make a single payment nine months after their year end. Thus "medium-sized" and "small" companies paying dividends will be favoured.
■ From 1 April 1999, the main rate of corporation tax was reduced from 31% to 30% and the small companies' rate of corporation tax was reduced from 21% to 20%.
■ The introduction of an employer's National Insurance rate of 12.2% from 6 April 1999.
■ From 6 April 1999 higher rate taxpayers have borne a tax liability at 32.5% on dividend income grossed-up to take account of the reduced tax credit(at 10%) from 6 April 1999.