The issue of whether to run your business as a company or a sole trade or partnership is an important decision. The cumulative effect of changes to the tax system over a number of years till date resulted in significant tax savings if a business was incorporated.

 

Changes in recent years have reduced these savings and the government has moved to discourage small businesses from incorporating by increasing the tax rates for small companies. In this factsheet, we briefly summarise the relevant tax changes and show the potential tax savings currently available from operating as a company.

 

This example calculates the position using the latest rates of tax and NI.

In addition we consider other relevant factors including potential disadvantages.

 

Tax Savings

The examples below give a rough indication of potential tax savings from our 2009 tax card that may be achievable for husband and wife who are currently in partnership.

 

Profits	30,000.00	50,000.00	100,000.00
Tax and N.I Payable	£	£	£
As Partners	5,356.00	10,956.00	27,228.00
As Company	4,017.00	8,217.00	20,391.00
Potential Tax Savings	1,339.00	2,739.00	6,837.00

 

The extent of the savings is dependent on the precise circumstances of the couple’s tax position and may be more or less than the above figures. The examples are computed on the basis that the couple:

• share profits equally
• have no other sources of income
• both partners take a salary of £5,435 from the company with the balance (after corporation tax) paid out as a dividend.

 

When might a company be considered?

 

A company can be used as a vehicle for:

• a profitable trade
• buy-to-let properties.

 

Summary of Relevant Tax and National Insurance Rates

 

Rate of corporation tax for small companies

• Main Rate taxed at 25% , from April 2023*.
• Small Profits Rate at 19%, from April 2023*.
• Lower Threshold, £50,000 *2023
• Upper Threshold, £250,00 *2023

 

National Insurance

• The rate of employees’ NIC is 13.25%. In addition, a 3.25% charge applies to all earnings over the NIC upper earnings limit (this varies by earnings and NI category). The rate of class4 NIC for the self-employed is 9.73% on profits over the lower profits limit, and 2.73% on profits above the upper limit as at Dec 2022. You only pay Class 4 NIC on profits above £11,908. So for example if you have self-employed profits above £50,270 you will pay Class 4 NIC on profits above £50,270 at a rate of 2.73%, FY2022.

 

• All NI contributions can be avoided by incorporating, taking a small salary up to the threshold at which NI is payable and then taking the balance of post-tax profits as dividends.

 

Pension provision

• As an employee/ director of the company, it should be possible for the company to make significant pension contributions to a registered fund irrespective of the salary level, provided justifiable under the wholly and exclusive rule. For further details of the tax position of pension provision for individuals please feel free to contact us to send you our complimentary factsheet on personal and stakeholder pensions.

 

Other Tax Issues

It is all too easy to focus exclusively on the potential annual tax savings available by operating as a company. However, other tax issues can be equally, and in some cases more significant and should not be underestimated.

 

Capital gains

Incorporating your existing business will involve transferring at least some of your assets (most significantly goodwill) from your sole trade or partnership into your new company. This can create significant capital gains although there are mechanisms for deferring these gains until any later sale of the company. We will need to discuss in detail with you the most appropriate mechanism for your business. Any gains which are chargeable may qualify for Entrepreneurs’ relief, which means that gains up to £1 million, are charged at 10% rather than 18%.

 

An outline of this relief is included in our factsheet, Capital Gains Tax. However its availability will depend on various factors and will require detailed discussion.

 

Stamp Duty Land Tax (SDLT)

There may be SDLT charges to consider when assets are transferred to a company. Goodwill and debtors do not give rise to a charge, but land and buildings may do so.

 

Income tax

The precise effects of ceasing business in an unincorporated form, including ‘overlap relief’, need to be considered.

 

Capital allowances

Once again the position needs to be carefully considered.

 

Other Advantages

There may be other non-tax advantages of incorporation and these are summarised below.

 

 Limited liability

A company normally provides limited liability. If a shareholder’s shares are fully paid he cannot normally be required to invest any more in the company. However, banks often require personal guarantees from the directors for borrowings. The advantage of limited liability will generally apply in respect of liabilities to other creditors.

 

Legal continuity

A company will enjoy legal continuity as it is a legal entity in its own right, separate from its owners (the shareholders). It can own property, sue and be sued.

 

Transfer of ownership

Effective ownership of the business may be more readily transferred, in comparison to a business which is not trading as a limited company.

 

Borrowing

Normally a bank is able to take extra security by means of a ‘floating charge’ over the assets of the company and this will increase the extent to which monies may be borrowed against the assets of the business.

 

Credibility

The existence of corporate status is sometimes deemed to add to the credibility or commercial respectability of the business.

 

Pension schemes

The company could establish an approved pension scheme which may provide greater benefits than self-employed schemes.

 

Staff incentives

Employees may, with adequate safeguards, be offered an opportunity to acquire an interest in the business, reflecting their position in the company.

 

Disadvantages

No analysis of the position would be complete without highlighting potential disadvantages.

 

• Administration

The annual compliance requirements for a company in terms of administration and accounting tend to result in costs being higher with a company than for a sole trader or partnership. Annual accounts need to be prepared in a format dictated by the Companies Act and, in certain circumstances, the accounts need to be audited by a registered auditor.

 

Details of the directors and shareholders are filed on the public register held by the Registrar of Companies.

 

Privacy

The annual accounts have to be made available on public record – although these can be modified to minimise the information disclosed.

 

PAYE/Benefits

If you do not have any employees at present, you do not have to be concerned with PAYE and returns of benefits forms (P11Ds). As a company, you will need to complete PAYE records for salary payments and keep records of expenses reimbursed to you by the company. Forms P11D may have to be completed.

 

 Dividends

If you will require regular payments from your company, we will need to set up a system for you to correctly pay dividends.

 

Transactions with the business owner

A business owner may introduce funds to and withdraw funds from an unincorporated business without tax implications. When a company is involved there may be tax implications on these transactions.

 

Director’s responsibilities

A company director may be at risk of criminal or civil penalty proceedings eg for late filing of accounts or for breaking the insolvency rules.

 

How We Can Help ?

There may be a number of good reasons currently for considering use of a company as part of a tax planning strategy. However as you can see from this factsheet, there are many factors to consider. We would welcome the opportunity to talk to you about your own specific circumstances.

 

Pentagon Global Finance

Tel  44 (0) 203 287 0900

For information of users: This material is published for information and some of the rates used might have changed. It provides an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm. Pentagon Finance – 2022

Our Ref: PGF/Fact-Sheet 10/ Incorporating your Business