There were important changes to corporation tax and capital allowances announced in the Budget, although they are staggered across several years, starting from April 2011.

Corporation tax rates

The main rate of corporation tax remains at 28% for the 2010 financial year. For 2011 it will fall to 27% while the small profits rate (formerly small companies rate) will be cut to 20%, instead of rising to 22%, as the previous Chancellor had planned. There will be three more cuts in the main rate of tax, bringing it down to 24% for the financial year starting on 1 April 2014.

Capital allowances

The Annual Investment Allowance (AIA), which gives 100% initial relief for investment in plant and machinery, was doubled to £100,000 from April 2010. Where a business's chargeable period falls either side of the April increase date (1 April for corporation tax, 6 April for income tax), the AIA for the year is proportioned accordingly. For example, a company with a year end of 31 December would have an AIA for 2010 of:

The Chancellor announced that AIA will stay at £100,000 for the 2011 financial year but from 2012 it will be cut to £25,000. At the same time the writing down allowances for plant and machinery will be reduced by 2% to 18% for the main rate pool and 8% for the special rate pool (which includes long life assets and integral features).

The reductions in allowances partially fund the cuts in corporation tax rates.

New business NIC incentive

The Chancellor announced an incentive for new UK businesses set up outside the 'Greater South East' (ie. London, South East England and the East of England). For a three year period, new businesses will not have to pay the first £5,000 of Class 1 employer NICs due in the first twelve months of employment for each of the first 10 employees hired in the first year of business. The scheme is intended to start no later than September 2010, but any new business established from 22 June 2010 which meets the relevant criteria will benefit from the scheme. Further announcements are due shortly.

PLANNING POINTS

Dividends or Salary ... or Pension Contribution?
The additional rate of tax and the tapering of personal allowances have altered the mathematics of the choice between dividends and salary for those with income of £100,000 or more. If you are in a position to choose between the two and not caught by the IR35 personal company rules (which the Government is reviewing), a dividend remains the more efficient choice, as the example below shows. However, a pension could avoid all immediate tax and NIC costs, provided the special annual allowance is not an issue. Indeed, a large employer pension contribution could be particularly attractive now, before the next change to the pension relief rules due in April next year.

Still Worth It Brian has £50,000 of gross profits in his company which he wishes to draw, either as bonus or dividend. Assuming the company pays corporation tax at the 2010 small companies' rate of 21% and Brian has annual income in excess of £43,875, his choice can be summarised thus:
	Bonus £		Dividend £
	40% tax	50% tax	40% tax	50% tax
Marginal gross profit	50,000	50,000	50,000	50,000
Corporation tax @ 21%	N/A	N/A	(10,500)	(10,500)
Dividend	N/A	N/A	39,500	39,500
Employer's National Insurance contributions £44,326 @ 12.8%	(5,674)	(5,674)	N/A	N/A
Gross bonus	44,326	44,326	N/A	N/A
Brian's NICs £44,326 @ 1%	(443)	(443)	N/A	N/A
Income tax *	(17,730 )	(22,163 )	( 9,875 )	(14,264 )
Net benefit to Brian	26,153	21,720	29,625	25,236
* after allowing for 10% tax credit on dividends The benefit of the dividend route is due to the savings in NICs; more tax (corporation tax and income tax) is payable under the dividend route. The difference between the 40% and 50% numbers explains why so many companies with substantial private shareholders brought forward their dividend payments to before 6 April 2010. The mathematics of dividends will become even more favourable next year because of the rise in NICs (1% for employers and employees) and the reduction in the small profits rate (to 20%).

Capital allowances timing issue

The large reduction in the 100% AIA in plant and machinery and the cuts in writing down allowance from 2012, together with the tax rate reductions from 2011, mean the timing of a major investment needs to be considered carefully.

It may be wiser to bring forward major purchases now to maximise the use of the AIA and writing down allowances rather than spread investment over several years – exactly the opposite strategy to the one which applied after the March 2010 Budget.

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