Small Company Tax Rates - simplified!

December 2005

In 2002 the Government introduced a zero per cent rate of corporation tax - it applied to companies with profits up to £10,000.

This opened up the possibility of earning up to £10,000 profit as a limited company and then distributing the profit as dividends to shareholders. For basic rate band shareholders this allowed them to earn and receive the £10,000 profit completely tax free.

Somewhat concerned by this apparent misuse of the zero rate band the Government introduced legislation called the "non-corporate distribution rate" in 2004 that effectively taxed all the company's profit at 19% if, the profits earned up to £10,000 were distributed to shareholders. In other words the first £10,000 zero rate band only applied if you retained the profit in the company.

After discussing this "over complicated" area of corporate tax with interested parties, both the zero rate band and the non-corporate distribution rate are to be abolished. There will now be a single small companies' rate of 19%.