The good news for British entrepreneurs is: the United Kingdom decided to reduce corporate tax. With this change, more than 3 million Britons and 600 thousand companies will not pay income tax. See what the cuts in income tax in the UK mean for your business.
The UK government is lowering the income tax, and increasing the tax-free amount and tax thresholds. This will benefit small businesses most. In a moment, you’ll learn how the planned changes will affect your business.
All because of Brexit?
Many experts admit that the coming Brexit is currently the greatest threat to the British economy. Therefore, the Office of Budget Responsibility lowered growth forecasts for UK GDP in 2016 from 2.4% to 2%, and in 2017 to 2.2% from 2.4%. The pound has weakened, also in relation to the zloty. British Chancellor of the Exchequer, George Osborne, said that the changes in the budget were intended to stimulate more and fit into the strategy of the government, despite the potential economic risks arising from Brexit. Lowering taxes and raising the tax-free amount is a clear signal for the British that the current economic policy of the country is right. Osborne has assured us that the state’s finances are stable and free from major threats. Cuts in income tax in the UK are possible thanks to the fact that the British employment rate is over 74%. For comparison, in Poland it is only 62% and is the lowest in the EU.
What will change?
By 2020, income tax for companies in the UK is expected to fall from 20% to 17%. At the same time, the amount tax-free, as every year, will grow – this time by about 350 pounds (to 11,850 pounds annually), or the equivalent of 62.1 thousand zlotys. Those working in the UK will be happy with the new budget. In the financial year 2017-18 tax-free amount is 11,500 pounds per year, and in the next there will be an increase to 11,850 pounds per year. In addition, tax thresholds have changed – the second threshold (with a rate of 40%) would start at 43,000 pounds in the 2016-17 fiscal year and 45,000 pounds in 2017-18. The third level (with a rate of 45% over 150,000 pounds) has remained unchanged.
The thresholds or exemptions for small companies with a minimum of 6,000 pounds per year to 15,000 pounds have also changed, and for the upper tier – from 18,000 pounds annually to 51,000 pounds.
Lowering taxes and raising the tax-free amount is a clear signal for the British that the current economic policy of the country is right. Osborne has assured us that the state’s finances are stable and free from major threats. Cuts in income tax in the UK are possible thanks to the fact that the British employment rate is over 74%
What does this mean for you and your business?
According to Osborne, thanks to this up to 600,000 small businesses will not pay income tax at all. The British government hopes to level the playing field between small local companies and large international corporations. It’s a good time for limited companies. In 2020, they will only pay 17% income tax on their profits, the lowest tax rate in the entire G20. A graduated tax decrease started back in 2010, when small businesses paid 21% income tax, and bigger ones – 28%. Currently, all companies pay 20% Corporation Tax, to reach 17% in 2020. Needless to say, for British companies this is a very important change and a big saving. How will the changes benefit your business?
If you act as a single entrepreneur, you pay income tax on your earnings, so depending on whether you are a lower or higher threshold taxpayer, you give the state 20% or 40% of your income. As a limited company you pay only 20%, and this rate will be decreased from year to year. This may mean that it will soon be more profitable to run your business as a limited company.
Cuts in income tax in the UK mean that companies will have more money to invest, for expenses and staff salaries, which in turn will stimulate the labour market and increase consumption.
The dark side of tax cuts
Remember that the corporation tax is not the only one you have to pay. Pay attention to changes in the taxation of dividends and other hidden taxes.
- Changes to taxation of dividends
The British government has changed some of the methods of withdrawing money from the business by means of dividends. Until April 2016, the payment of dividends received a 10% tax charge for taxpayers at the lower threshold and 35% for higher threshold taxpayers. But that fee meant that lower rate taxpayers did not have to pay anything, while those with a higher rate actually paid 25%. Everything changed with the beginning of the new fiscal year. Today, everyone has the opportunity to benefit from a tax-free dividend of £5,000, but when you earn more, the fee is 7.5% for lower rate taxpayers and 32.5% for those at the higher rate.
- Hidden taxes
A recent IFS report warns that many of the recent decreases in taxes for small businesses and individuals are balanced by an increase in hidden taxes such as the tax on insurance premiums, cutting public spending or increases in stamp duty for property owners.