Wednesday, 16 February 2011

Tax Tips - Incorporation

Top Tips - Tax
If you business currently operates as a Sole Trader (sometimes known as Self Employment) or a Partnership, it may be possible to save thousands of pounds in Tax. Recently a business with £30,000 profits saved £2,400 tax a year and another with £50,000 profits saved £4,500 tax a year.

How can this be true?

This can be achieved by transferring your business into a Limited Company which offers more flexibility to how you are paid (salary or dividends) and when the payments are made.

Sole Traders and Partners are taxed on their profits as General Income Tax with current rates of 20%, 40% and 50%.

Limited Companies can pay out profits as salaries (which would be taxed as General Income Tax) or dividends to the shareholders (Owners) and dividends do not incur any extra Income tax payable below the basic rate band, currently £37,400 (above the basic allowance, currently £6,475).

Thus a business operating as a Limited Company could choose to pay a large amount of their profits as Dividends rather than salary and save tax.

What are the catches?

The calculations above include all relevant taxes (National Insurance, Income Tax and Corporation Tax), so the savings are realistic but will differ from business to business.

All circumstances are different and to check your own potential tax savings would require you (or a tax advisor) to calculate the tax savings for your particular circumstances.

There are more legal and administrative requirements for a company (e.g. preparing formal accounts for Companies House), and this will add some extra cost but generally only a fraction of the savings.

How can I find out more?

Come and talk to us, we are local, and we will help you with the calculations and discuss whether it is right for your business. There is no charge or obligation for the initial meeting.

Tim Hulse

Piper Hulse
Accountancy & Business Advisory

16a Stafford Street
ST21 6BH

Tel: 01785 850 060

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