All types of business face taxes on their profits and gains.
The trading profits and other gains created by any type of business in the UK are subject to tax of some type:
Companies, sole traders and partners are all subject to the rules for VAT, so that they must register for UK VAT and charge the correct rate of VAT on their supplies once their UK taxable supplies pass the registration threshold (£82,000 for 2015/16). Voluntary registration is also permitted.
Sole traders and partners are subject to income tax at 20%, 40% or 45% (basic rate, higher rate and additional rate, respectively) on their profits from the business, as it arises, and they are also subject to Class 4 National Insurance Contributions (NICs) on those profits (9% up to the upper earnings limit, and 2% thereafter). Any chargeable gains arising from the disposal of assets are subject to Capital Gains Tax (CGT) at 18% for any remaining basic rate band, and 28% thereafter.
Companies are not subject to income tax or CGT, but instead pay corporation tax (currently at 20%) on all profits and chargeable gains. It may appear from this that companies have significantly lower tax, but the post tax profits and gains still need to be extracted from the company by the shareholders.
The current effective rate on taxes for dividends mean that the profits are effectively taxed at 20%, 40% and 44.44%, broadly matching the tax on profits, meaning that the main tax saving is that no NICs are charged on company profits or dividends.
From April 2016, the taxation of dividends is changing to reduce the difference in taxation between company profits and sole trade or partnership profits. The effective tax rates on profits will become 26%, 46% and 50.48%.
If you would like more information regarding business taxes or profit extraction, please email email@example.com or call us on 01962 856 990.
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