To incorporate or not incorporate? That is the question!
In recent years the changes to the UK tax system have become more complex having had a period of stability under the previous Labour administration and one of the recurrent questions is at what point is it more tax efficient to operate through a company rather than as an individual.
Putting aside non tax considerations such as limited liability and the picture you give to the outside world and assuming you are currently trading as a non-incorporated entity is it worth the change.
For 2018/19 a sole trader with taxable profits of £25,000 will only save approximately £700 in tax and national insurance contributions (NICs) if all profits earned have to be extracted. This saving is likely to be swallowed up by additional compliance fees such as company accounts.
At a profit level of £50,000 the savings become around £2,000 so might outweigh the additional compliance costs.
Beyond this the savings continue to increase until a profit level of £70,000 beyond which the savings start to decrease. Beyond £145,000 it actually costs you more to operate through a limited company.
If a spouse can be involved either as a partner or as a shareholder/director of the limited company this will usually increase the tax savings but one size does not fit all.
If already operating as a limited company with just one shareholder/director and no other employees then the payment of a salary up to £8,424 and a dividend thereafter is still the most tax efficient way of extracting the profits even though the dividend allowance has been reduced from £5,000 to £2,000 in 2018/19.
If profits do fluctuate then smoothing out the extraction or making tax efficient company pension contributions or tax exempt benefits may be more worthwhile than just taking dividends. Company (employer) pension contributions are also an allowable deduction for corporation tax in the year that they are paid.
Lending money to your personal company can also be tax efficient as interest paid on the loan will usually be tax deductible for corporation tax and if your taxable income from earnings is less than the personal allowance up to £6,000 interest can be paid free of tax in your hands.
One size does not fit all so do talk to one of us.
If you would like to speak to a member of our team please get in touch!