You can still save tax by operating your business through a company rather than as a sole trader or partnership, but the level of tax savings will depend on the range of salary, dividends and benefits that you want to take out of the company.
If you take a salary equal to the personal allowance of £6,475, and extract the rest of the profits as dividends, you could make the following tax savings in the current tax year. This salary level involves paying some NICs as the NIC threshold is £5,715, but a lower salary would waste part of the dividend tax credit. Salary is also tax allowable for the company whereas dividends are not.
For 2009/10 the following shows for different profit levels the tax payable as a sole trader, by incorporating as a company and the total saving...
Profits £15,000: Sole trader: £2,573 - Company £1,951 - Total saving: £622
Profits £30,000: Sole trader: £6,773 - Company £5,101 - Total saving: £1,672
Profits £50,000: Sole trader: £13,169 - Company £9,463 - Total saving: £3,706
Profits £100,000: Sole trader: £33,669 - Company £29,838 - Total saving: £3,831
Profits £150,000: Sole trader: £54,169 - Company £50,213 - Total saving: £3,956
There are other tax factors to consider. For example...
- If the company owns a car that is used privately by the business owner, this can seriously reduce the tax savings. However, the answer is not straight forward as it depends on the cost, age, and CO2 emissions of the car (see below).
- The amount of profits left within the company for future use. If dividends are only taken to take your income up to the level of basic rate tax, substantial further savings of many thousands are possible!
- The availability of tax-free benefits such as childcare vouchers.
Tax rates are due to increase from 2010/11.
Individuals will pay a top rate of 50% on income over £150,000 and the personal allowance will be withdrawn for those with income over £100,000. The tax rate paid by a small company will also rise to 22%. These changes will reduce the tax savings to be made by operating through a company. The calculations summarised as follows for 2010/11 assume a salary equal to a personal allowance of £6,635, which is reduced to nil when profits exceed £113,000.
Profits £15,000: Sole trader: £2,530 - Company £2,004 - Total saving: £526
Profits £30,000: Sole trader: £6,730 - Company £5,304 - Total saving: £1,426
Profits £50,000: Sole trader: £12,998 - Company £9,704 - Total saving: £3,284
Profits £100,000: Sole trader: £33,448 - Company £30,273 - Total saving: £3,215
Profits £150,000: Sole trader: £56,642 - Company £53,633 - Total saving: £3,009
Contact me about the savings possible for you. I can provide a calculation specific to your circumstances and outline the many other factors you will need to consider when incorporating.
A blog providing UK tax information and planning ideas from John Pointon, Accountant, Business and Tax Consultant. Please send any suggestions for topics you would like to see covered to me at jpointon@gmail.com or 34 Lightley Court, Sandbach, Cheshire, CW11 4QA or phone 01270 763 466.
Subscribe to:
Post Comments (Atom)
Disclaimer
The information contained on this site is for general guidance only. You should neither act, nor refrain from action, on the basis of any such information. You should take appropriate professional advice on your particular circumstances because the application of laws and regulations will vary depending on particular circumstances and because tax and benefit laws and regulations undergo frequent change.
Whilst I will do the best i can to ensure that the information on this site is correct at the date of first posting, I shall not be liable for any loss or damages (including, without limitation, damages for loss of income or business or increased liabilities) arising in contract, tort or otherwise from the use of or inability to use this site, or any information contained in it, or from any action or decision taken as a result of using this site or any such information. Third parties are responsible for ensuring that material submitted for inclusion on this site complies with appropriate law. I will not be responsible for any error, omission or inaccuracy in the material submitted by third parties.
I accept no responsibility for the availability or content on any site to which a hypertext link from this site exists. The links are provided on an "as is" basis and I make no warranty, express or implied, for the information provided within them.
You are permitted to access, print and download extracts from this site on the basis that the use of all material on this site is for information and non commercial or personal use only; any copies of these pages saved to disk or to any other storage medium may only be used for subsequent viewing purposes or to print extracts for personal use.
By accessing any part of this site, you shall be deemed to have accepted these terms in full.
These terms shall be governed by and construed in accordance with English Law and the courts of England shall have exclusive jurisdiction.
I will not respond to individual queries posted as comments on this blog. If you need advice on a specific situation, email the full details to me at jpointon@gmail.com.
No comments:
Post a Comment