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The Budget painted a pretty bleak future for the UK – was there any good news?

The Budget introduced some hard to swallow measures aimed at stimulating recovering and

growth in the economy. At a macro level, these measures centre on Government spending cuts and tax rises and almost every individual in the UK will be affected, the majority adversely. There was, however, somewhat better news for business owners. The Chancellor believes that in order to kick start the economy and drive the UK out of the downturn, private enterprise and businesses must be revitalised. He has therefore introduced a raft of tax saving plans and initiatives specifically designed to give businesses a shot in the arm.

How can I take advantage of the reduction in Corporation tax rates?

Corporation tax is essentially a tax on a company’s profits, so a reduction in its rates is always

welcomed.
With the main rate of corporation tax being reduced from 28% to 24% over the next four years (the first 1% reduction coming into effect from next year) and the small companies rate being reduced from 21% to 20%, businesses should be able to retain more profit. Rather than hold this profit in the form of cash, which given current rates of interest may not even keep pace with inflation, businesses could take the opportunity to invest. Investments which make use of corporation tax reliefs will be particularly attractive as relief can be obtained before 6 April 2011 at the current 28% rate but at the reduced rate upon realisation of the investment in future years.

Additionally, lower corporation tax rates may encourage more owner managers to keep cash in their business rather than extract it via salary which is taxed at higher income tax rates (up to 50% or 42.5% if via dividend). A more efficient solution may be to make an employer contribution to a pension. Such a contribution made before the 1 April 2011 will effectively receive an extra 1% of corporation tax relief on the contribution.

Won’t National Insurance rate rises mean increased staff costs ?

1% increases to both the employer’s and employee’s national insurance rates from 6 April 2011 will increase business costs. However, the threshold at which employers start to pay national insurance will also increase by £21 per week so should help lessen the impact of the increase in rates. To counter this, an arrangement (known as salary sacrifice) whereby an employee gives up the right to an amount of salary or bonus before it is paid in exchange for

an employer pension contribution should be considered. By doing so, an employer may benefit as follows

  • corporation tax relief on the employer pension contributions
  • 12.8% (13.8% from 6 April 2011) saving on employer national insurance contributions.
  • 11% (12% from 6 April 2011) saving on national insurance contributions
  • Income tax saving on the sacrificed sum Salary sacrifice could therefore be beneficial for both employees and employers in the 11% (12% from 6 April 2011) band.

What will happen if I sell my business?

As a further positive signal to business owners, the Chancellor announced that the 10 per cent rate of CGT that applies to the first £2 million of entrepreneurs' gains over a lifetime will now apply to the first £5 million of those gains. This means an even greater number of business owners will not be liable to the increased CGT rates when they look to sell their company. Any business owner intending to sell up should consider planning well in advance

of the intended event and seek professional advice. Areas to consider are financial protection in the event of death and how to structure the sale proceeds in order to provide an ongoing income.

Ian Pickford

Head of Financial Planning

ian.pickford@mazars.co.uk

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