The tax savings that a business can make by transferring to a limited company can be frequently offset by other costs. Accordingly the decision to incorporate should not be taken for tax reasons alone. There are often other key issues to recognise, such as:
- The benefits and protection of limited liability.
- The tax impact of business motoring costs – when a business is run through a limited company a tax charge could arise on the car as a benefit in kind.
- There is also the not inconsiderable burden of administration to consider. Accounts and returns must be filed with Companies House, and the company tax return must now be filed through a new technology known as iXBRL which would increase administration costs.
The potential tax savings also depend on whether the owner of the business will need to withdraw all of the profit he makes from the business, or whether some will be left in the company. As a sole trader (or partnership) the business is taxed on all of the reported profits at the taxpayer’s marginal tax rate. For a company however the profits are taxed at either the small profits rate of 20% (from 1 April 2011), the main rate at 26% currently or a marginal rate depending on the level of the company’s income.
If you are at present running your business as a sole trader or in a partnership and:
- You do not need to draw all the profits you make, and
- You are likely to be paying tax at the higher income tax rates at 40% and 50%,
then it may be worth crunching the numbers to see if there are savings to be made through the incorporation of your business.
We would be happy to assist and guide you through this process.
Please do give me a call if you have any queries.
Sue Stephens
Tax Manager
