Businessman thinks he found a loophole

HAS Norman Lamont unintentionally created a loophole with his measure to reduce the tax on share dividends? A West Country businessman and his accountant think so.

The businessman says that about half his earnings are paid to him via his limited company. As with many one-man companies, he pays himself a low monthly salary of just over pounds 200, to avoid paying National Insurance. At the end of the year, he pays advance corporation tax at 25 per cent on his profit, and then pays himself the 'forgone salary' as a dividend - with no further tax liability.

Since the Chancellor has announced a reduction in ACT to 20 per cent - and said that ordinary shareholders' dividends will also be taxed at 20 per cent - he believes he will be liable to tax of just 20 per cent on about half his annual salary.

Accountants at leading firms accept the point, but doubt that it is a cause for celebration.

If the business is earning enough to attract higher-rate tax (more than pounds 23,701), the owner will be liable for an extra 20 per cent of tax - the difference between the new ACT rate of 20 per cent and higher-rate income tax - and so will be worse off. If he is a basic-rate taxpayer, the effect is neutral.

While accepting that NICs could be saved this way, they say the owner-manager might be better off paying corporation tax at the small companies (those with profits of less than pounds 250,000) rate of 25 per cent.