Is incorporation still the right decision?

10th April 2017 | Posted in: Allowances, Government Announcements, PAYE & NI, Planning, Regulations limited companies

What is the most tax efficient way of operating a business?

After the announcement in the Spring 2017 budget that the tax free dividend allowance will reduce to £2,000 from April 2018, many business owners have been left wondering whether a limited company structure is still the most tax efficient way of operating a business.

Here is a recap of some of the benefits of operating through a limited company as opposed to sole trader:

  • Shareholders of an incorporated business have limited liability giving personal asset protection.
  • Dividends received by directors of limited companies over the tax free allowance (currently £5,000) and up to the basic rate band are taxed at 7.5%, compared to profits from a sole trader business being taxed at 20% up to the basic rate band.
  • The rate of corporation tax is reducing to 19% from April 2017 with a further reduction to 17% set for 2020.
  • There is the option of making a contribution into your personal pension from the company, which is a good way to save for retirement whilst also reducing the taxable profit of the company.

Based on current tax rates it is more tax efficient to operate through a limited company when taxable profits exceed £20,000. However there is more regulation and higher compliance costs involved in running a limited company and therefore advice is essential before making this decision.

Update – 26th April 2017 – Please note that in view of the impending election in June the measure to reduce the tax free dividend allowance to £2,000 has now been dropped from the Finance Bill 2017.  It may of course resurface in the next parliament depending on which party wins.

Please contact us and we will put you in contact with a member of our team to discuss your options or for a detailed calculation of what your tax liabilities might be in a sole trader or limited company scenario.

If you feel we could help you and would like to discuss any of the above, please contact Jennifer Innes LLB (Hons) CA on 0131 317 7377 or email to jennifer.innes@jsca.co.uk.
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