A cut in UK Corporation Tax – great news for investors?

05 July 2016
 

In a response to the UK’s shock decision to leave the EU, calls for a cut in UK corporation tax have been growing to send a message that the UK remains “open for business”. The idea has been given additional impetus by the current Chancellor, George Osborne, suggesting a cut to 15% or lower – a level that would approach the 12.5% in Ireland. Corporation Tax represents the rate of tax that UK based companies pay on the profits that are made each year, with the current rate of 20% already due to be reduced to 19% during the remainder of this Parliament. Gary Smith, Financial Planner at Tilney, highlights that whilst such a move would be good news for UK based companies and potentially attract new businesses to the UK, it is could also provide cheers for UK investors and savers.

“So how will investors potentially benefit from a reduction? Well those who invest in UK based equity funds could see an increase in the dividends received as, if the underlying company is paying less Corporation Tax on its’ profits, it will potentially have a greater level of profits to distribute as dividends. This would benefit those investors who access these types of funds through their pensions, Unit Trust/OEICs and Investment Bonds (both onshore and offshore versions).

“Those who invest in UK Onshore Investment Bonds however could benefit further due to the taxation of these types of investment vehicles. Under current legislation the provider of Onshore Bonds have to pay Corporation Tax on income and growth within the investment funds at the current rate of 20%. The bond provider is permitted to claim indexation relief on growth within the funds, which results in the actual rate of Corporation Tax payable being below 20%, with the widely held understanding that the actual rate of tax is somewhere between 18% and 19%.  Should Corporation Tax be reduced to 15% or less then the tax paid on UK onshore bonds will also reduce, thus potentially providing higher ongoing investment returns, which will benefit the investor.

“Onshore Bond investors will further benefit on the personal tax that they will have to pay on any gains realised when they take withdrawals from their investments. Under current tax legislation basic rate taxpayers don’t have any further tax to pay on the gains made, as the Corporation Tax paid by the provider is deemed to meet their basic rate tax liability of 20%. Given that the bond provider would effectively be paying Corporation Tax at less than 15% (due to indexation relief), this is an effective saving in personal tax of 5%, although this can’t be reclaimed by the investor. Higher rate taxpayers will also benefit from this reduction in Corporation Tax as, although they have to pay 40% on any gains made, they will continue to only have to pay 20% as it is deemed that the provider has paid 20%.

“One set of savers who would lose out from this reduction would be those who use their own businesses, such as controlling directors of SMEs, to pay into their pension plans. Currently, employer pension contributions qualify for Corporation Tax at 20%, resulting in a £1,000 pension payment effectively costing the company £800. However, should Corporation Tax be reduced to 15%, the effective cost of a £1,000 pension payment would be £850, an increase in cost of £50 to the employer. Those individuals who are saving for their retirement through their businesses might be wise to seek to maximise pension contributions whilst 20% Corporation Tax remains available.

“Ultimately, there has potentially never been a better time for savers and investors, with the Chancellor already introducing tax-free interest on savings for basic rate taxpayers (£500 for higher rate tax payers), the first £5,000 of dividends being paid free of tax and an increase in the ISA allowance to £20,000 from 6th April 2017. We would very much welcome a reduction in Corporation Tax to help investors boost investment returns during a period when the returns from investments are being squeezed in a low interest rate / low inflation environment.”

To discuss this or any other financial planning topic please contact Gary Smith on 0191 269 9971/ gary.smith@tilney.co.uk

-ENDS-

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