Posted by James Pearson on 21 Nov 2014

Incorporating Your Business and the Benefits

Have you considered changing your profitable sole trade or partnership into a company? Doing so could save you a significant amount of tax.

As a sole trader/partner, you are paying income tax on the profits of your business in full each year at up to 45%. In addition to this, you have to pay Class 2 & 4 national insurance.

A company would pay corporation tax at 20% on its profits, but any further tax is only charged when you draw the profits out of the company. By using a combination of salary and dividends you can take out over £38,500 without paying any income tax or national insurance.

For example, if your business makes £45,000 profits in 2014/15, you will pay £7,627 in income tax and £3,258 in national insurance on those profits, a total of £10,885 to the taxman. Moving your business into a limited company can reduce the total tax payable to £7,245, saving £3,640, or over a third of the tax.

If your spouse works in the business they can also benefit in the same way, doubling the profits that can be extracted with no more tax to pay. Additionally, if you earn extra profits one year, you can leave them in the company until it is beneficial from a tax perspective to access them.

Other Benefits of Incorporation

As a sole trader or partner, you are personally liable for all the business’ debts, putting your home and other assets at risk. Limited company shareholders are only liable for the amount they have invested in the company.

The company is a separate legal entity, so continues after the death of the owner – useful for IHT planning. This is aided by the ease with which shares can be transferred.

Many clients, especially big corporates, will be more inclined to do business with limited companies.

If your business would be of value to a third party, the process of incorporation can allow you to draw cash from the company at a tax efficient rate of 10%.

Won’t it Cost More?

While it is true that the ongoing fees for a limited company will be higher than for your unincorporated business, if incorporation is right for you, the saving of tax should far outweigh this amount, leaving you better off each year.

If you wish to discuss the benefits of incorporation, or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com.