Budget 2017: increase in NIC charge and a tightened tax net

8 Mar, 2017

Partners in professional firms: NIC increase

Partners may be concerned to hear of an increase in their NIC charge, as announced in the Budget. But it is not as bad as the headlines suggest. When combined with the increase in the threshold before the higher 40% tax band starts, the impact is minimal.

The increase in the 40% threshold will reduce partners’ tax/NIC bills by just under £200 in 2017-18. The rise in Class 4 NIC a year later is partially offset by the abolition of Class 2, and means there is an increase of £220 NIC in 2018-19. There will then be a further increase in Class 4 NIC a year later which will add an extra £370 NIC to partners’ tax bills in 2019-20.

Louis Baker, Head of Professional Practices summarises:

“Partners may well be pleasantly surprised. Their tax bills reduce slightly over the next tax year and it is only in two years’ time that they face a net increase in tax and NIC of about £400. This is not much change at all.”

Professional practices: service companies attacked

The Chancellor has announced a further tightening of the tax net around the use of service companies by firms seeking to achieve a tax saving.

A year ago the Chancellor introduced a higher rate of tax on dividends to counteract the reduction in corporate tax rates which was otherwise encouraging the use of companies within partnership structures. However the Chancellor also introduced a £5,000 dividend allowance which meant that many firms found that their service companies were still marginally tax beneficial.

Today the Chancellor has announced that the dividend allowance will be reduced to £2,000, which will reduce the tax effectiveness of routing profit through a company.

As Louis Baker, Head of Professional Practices says:

“The reduction in the dividend allowance will mean that for many firms their service company will now be tax inefficient.”

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