Company tax query

I'm thinking of incorporating my sole trader business to save on tax, as I'm well into the higher tax rate, but from what I've gleaned, I wonder if I will actually pay much less tax at the end of the day by doing so. From what I understand, keeping it very simple, as co director I could draw up to about 36K per year (salary + some dividends) and keep below the higher rate tax level. Then the profit remaining in the co would be subject to corporation tax at 19%. So no higher rate tax anywhere there then. But can I then get the profit out of the company without paying tax again on it? If not where is the tax advantage of a ltd co? Thanks, FF

Reply to
Freddie
Loading thread data ...

Your salary is a company expense which reduces its profit, but dividends are not, so your salary can be paid out of pre-corporation-tax profits, but dividends have to be paid out of post-CT profits.

Corporation tax is going up from 19% to 20% this year, by the way, while basic rate income tax goes down from 22% to 20%.

Principally in saving national insurance contributions.

The usual wheeze is to pay salary up to the NI threshold, which is approximately equal to the Personal Allowance, so that you get credited with basic state pension qualifying years without actually having to pay any NI.

The rest you get as dividends, on which because of the inbuilt tax credit, no income tax is payable by you, though of course corporation tax will have had to have been paid.

Comparing self-employed with company, the first 5k or so of raw profit is tax free in both cases.

In the self employed case, the next 34k of profit would incur 20% income tax plus 8% NI. Thereafter (ignoring the fact that the higher rate tax threshold and the upper NI limit are not quite the same), the incremental rate increases from 28% to 41% (40% income tax plus 1% NI).

In the company case, the next 39k of raw profit (above the first 5k) would incur 20% corporation tax, and the remaining 31k can be paid as dividends with no further tax payable by you. Thereafter you would pay income tax at the higher rate for dividends, which is 32.5%, but due to the tax credit works out at only 22.5% on the notionally grossed-up dividend. In practice this means you pay 25% on any dividends above 31k. This means that at the 39k raw profit boundary, your marginal rate of tax goes up from 20% to 40% (i.e. each pound of raw profit leaves 80p after CT, and those 80p after 25% dividend income tax leave you with 60p).

This means at the higher rate the company route costs you 40% whereas the self-employed costs 41%. Only a small difference, but the real saving of the comapny route comes from the fact that the earlier marginal rate is 20% instead of 28%, and that the transition boundary is some 5k higher. That is to say that the first 39k of raw profit would leave you with 80% = 31.2k in your pocket as a company person, but as a self-employed person, you would have 72% of about 34k plus 59% of about 5k = 27.4k, so you'd be almost 3k better off with a company. Not an awful lot, considering the extra admin a company involves, and you will probably find it more necessary than as a sole trader to employ an accountant.

Reply to
Ronald Raygun
20% | instead of 28%, and that the transition boundary is some 5k higher. That | is to say that the first 39k of raw profit would leave you with 80% 31.2k | in your pocket as a company person, but as a self-employed person, you | would have 72% of about 34k plus 59% of about 5k = 27.4k, so you'd be | almost 3k better off with a company. Not an awful lot, considering the | extra admin a company involves, and you will probably find it more necessary | than as a sole trader to employ an accountant. |

Many thanks Ronald, you sure know you co tax! I had this same mental crisis (self emp v. co) last January when I worked out how much tax I had to pay (online), and this year it's even more -argghhh! But you have confirmed my suspicions, i.e. that now I am well past the early tax saving stage, I might as well remain sole trader. Cheers, FF

Reply to
Freddie

No it is not. Company tax is 19%. There used to be a tax free band of

10,000 but that is no more.
Reply to
Stickems.

"Stickems." wrote

RR is considering paying the first 5K from the company as salary, so it *is* tax-free.

You should look at the part of his post that you snipped...!

Reply to
Tim

You should pay only your personal allowance as salary, and the rest as dividends. Once you get in to the higher rate band, you pay 25% of dividend you receive in tax.

Corporation tax will be 21% next year.

Reply to
Jonathan Bryce

... and 22% the year after that (09-10).

Despite this, and the IT BR dropping to 20%, the NI upper limit is increasing significantly (15%) in April and, IMHO, will continue to do so in the following years. Maybe even the 8% NIC4 rate will move closer to NIC1 (11%).

Relief on private pensions can also swing the argument.

So I reckon it's worth doing the detailed calcs before dismissing the idea of incorporation.

Reply to
Martin

"Martin" wrote

If the NIC4 rate did move to the NIC1 ("contracted-in") rate of 11%, do you think s/e people will get S2P?

Reply to
Tim

The previous message in this conversation was not from me.

Reply to
Stickems.

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.