The issue of whether to run your business as a company or a sole trader or partnership is an important decision. There are advantages and disadvantages to each structure and potential tax savings to be made by operating as a company.
Changes that have been implemented since 6 April 2016 have significantly reduced the tax savings in comparison to prior years. These are as follows:
The 10% dividend tax credit has been abolished
New rates of tax on dividend income are 7.5% for basic rate taxpayers (previously nil), 32.5% for higher rate taxpayers (previously 25%) and 38.1% for additional rate taxpayers (previously 30.6%)
A tax free allowance of £5,000 for dividend income each year
As always, there will be winners and losers. A higher rate taxpayer with dividend income of £5,000 would have had a tax liability of £1,250 (25% of £5,000). From April 2016 they will no longer have a tax liability.
But a shareholder who takes a salary based on their personal allowance and dividends up to the higher rate threshold would previously have had no income tax to pay. From April 2016, only £5,000 of the dividends will not be taxable.
Depending on personal circumstances there are savings to be made from incorporating, even where all annual profit is paid out, savings of over £1,300 can be achieved on profits of £50,000 and over £4,500 where profits are £100,000.
Where personal circumstances allow the savings can be significantly higher where some of the annual profit is retained in the business.
Limited liability - A company generally provides limited liability. A shareholder cannot normally be required to invest any more in the company than their initial investment.
Transfer of ownership - Effective ownership of the business may be more readily transferred, in comparison to a sole trader or partnership business.
Borrowing - Banks are able to take extra security by means of a ‘floating charge’ over the assets of the company. This will increase the extent to which monies may be borrowed against the assets of the business.
Credibility - Corporate status is often deemed to add credibility or commercial respectability to a business.
Pension schemes - The company could establish an approved pension scheme which may provide greater benefits than self-employed schemes.
Administration/Accounting - Annual compliance requirements often result in costs being higher for a company than for a sole trader or partnership. Annual accounts need to be prepared in a format dictated by the Companies Act and may need to be audited.
Privacy - The annual accounts together with details of directors and shareholders have to be made available on public record.
PAYE/Benefits – In order to pay directors salaries, a PAYE scheme is necessary, salary details must be submitted on a timely basis under Real Time Information. Records of expenses reimbursed by the company will also be needed. P11D forms may be required for benefits in kind.
Directors’ responsibilities - A company director may be at risk of criminal or civil penalty proceedings e.g. for late filing of accounts or for breaking the insolvency rules.
There are many times during the life of a business where additional support and advice are important and we would like to be there to assist you make the most of your business.
The decision to incorporate or not is a personal one and we are happy to look at your individual circumstances and advise on the best course of action for you and your business.
There are a number of good reasons for considering incorporation. For further help or advice, call Sarah Clyde on 01205 310250 or email firstname.lastname@example.org
There are a number of good reasons for considering incorporation. For further help and advice please call Paul McCooey on 01754 899899 or email email@example.com.
There are a number of good reasons for considering incorporation. For further help and advice please call Keith Phillips on 01529 303773 or email firstname.lastname@example.org.