| According to a new survey carried out by Alliance | | | | next April adds to both theemployees' and |
| & where ID_NUM=9270; | | | | employers' tax burden and may more thanoffset |
| Leicester, one in five small business owners view | | | | the saving from the corporation tax zero rate on |
| tax astheir greatest concern. The Chancellor has | | | | thefirst œ10,000 of profits. |
| announced in hislast budget that companies with | | | | Aren't there any other matters to consider in |
| profits below œ10,000 willnot have to pay | | | | decidingwhether to incorporate or not? |
| any corporation tax with effect from 1 April | | | | Higher administration costs to comply with |
| 2002. The question to be asked is: does that | | | | company law,payroll and bookkeeping is one |
| announcementmake incorporation a more | | | | factor. Another issue ispension planning. Extracting |
| attractive option compared tobeing a sole trader? | | | | profits out of the company asdividends rather |
| The answer is that from a tax point of view, it | | | | than salary means that there will be no |
| isadvantageous to trade through a limited | | | | "net relevant earnings" and therefore pension |
| company as longas the income is drawn from the | | | | contributionscan't be made. But the advent of |
| company by the owners asdividends from their | | | | stakeholder pension planshas meant that |
| shares and the amount of dividendsdrawn is | | | | contributions up to œ3,600 per year can |
| restricted below the 40% band rate (i.e. | | | | bemade without the need for any earnings. If a |
| œ31,063for tax year 2002/03). That way, | | | | person does notwish to transfer funds in existing |
| the owners have no furtherpersonal tax ("income | | | | plans into stakeholderbecause of high charges, |
| tax") to pay. Moreover, dividends arenot subject | | | | there is a way out: the best netrelevant earnings |
| to national insurance contributions. This isexcellent | | | | (i.e. salary) in five consecutive yearscan be used |
| news of course. But, if dividend income fallswithin | | | | for making contributions for the next fiveyears, |
| the higher rate bracket of income tax (i.e. above | | | | even if there were no salaries in the remainder |
| œ34,515), they will be taxed at 22.5% on | | | | fouryears. It is comforting to know that |
| the excess, whichof course will increase the tax | | | | entitlement to basicstate pension is not affected |
| burden. The company profitsare subject to | | | | by taking a salary from thecompany at the level |
| corporation tax rates. Those are lower | | | | of a person's personal allowances i.e. |
| thanincome tax rates. | | | | œ4,615. |
| The most catastrophic scenario is when the | | | | Furthermore, an individual may decide not to |
| director takeshis reward from the company as | | | | bother withpension plans and instead invest in ISA. |
| salary. Then his/her salaryis taxed at income tax | | | | Often, these can bemore efficient than pensions |
| rates (like a sole trader's income). | | | | but that's beside the scope ofthis article. If that |
| That is because, unlike sole traders, the tax | | | | option is taken, no salary isnecessary. |
| system treatscompanies as separate from their | | | | Another factor is business motoring. It might be |
| owners because a company isa separate legal | | | | taxadvantageous for an unincorporated business |
| entity. The problem is that the incometaxes are | | | | that owns manycars not to incorporate because |
| higher than corporation tax rates. On top ofthat, | | | | if these cars have someprivate use there will be |
| they will be subject to employee and employer | | | | benefits in kind taxed on theusers. These are |
| nationalinsurance contributions, which of course | | | | generally higher than the straightapportionment |
| increase the taxburden and render his position | | | | between private and business for all carrunning |
| worse than even anunincorporated business ("sole | | | | costs in the case of sole traders. |
| trader"), because NIC Class 1on payroll are higher | | | | The conclusion is that there can be considerable |
| than NIC Class 2 paid by selfemployed. | | | | tax savingswaiting the sole trader who decides to |
| In contrast, a self employed person ("sole trader") | | | | go down theroad to incorporation. But, one needs |
| is taxedat income tax rates on the profits from | | | | to proceed withcaution and careful planning. And |
| his business, whichare added to his other sources | | | | don't forget the biggestadvantage of |
| of income. As it has alreadybeen mentioned, | | | | incorporation, which is Protectionfrom Personal |
| income tax rates are overall higher | | | | Liability. Incorporating is one of the bestways to |
| thancorporation tax rates. On top of income tax, | | | | protect a business owner from personal liability. |
| nationalinsurance contributions class 4 are payable | | | | Shareholders of a company are generally not liable |
| on the businessprofits within a specified band (7% | | | | for theobligations of the company. Creditors of a |
| on profits between | | | | company may seekpayment from its assets, but |
| œ4,615and œ30,420). National insurance | | | | not the assets of theshareholders. This means |
| contributions Class 2are also paid by | | | | that business owners may engage inbusiness |
| self-employed people, although those arelower | | | | without risking their homes or other |
| than those payable by company directors on | | | | personalproperty. |
| theirsalaries. | | | | Thank you for taking the time to read this Article. |
| To illustrate the above, let's take a simple | | | | I hopeyou've found it useful. If you have, please |
| example. Wehave a limited company and a sole | | | | drop me an emailand let me know what you think. |
| trader. They both make | | | | You can email me Alternatively, you can visit our |
| œ60,000 profits each in the tax year 2002 | | | | website at and read a series ofother full length |
| 03. We assume thatthe company director takes a | | | | articles that present the complete pictureon a |
| salary equal to the amount ofhis personal | | | | variety of interesting topics. |
| allowances (untaxed income) of œ4,615 and | | | | If you would like to know how to save tax and |
| thebalance as dividends. The company will pay | | | | make sure thatmore of your hard earned cash |
| corporation taxat 19% equal to œ10,523 and | | | | stays with you to expand yourbusiness and |
| nothing else. The sole traderwill pay income tax | | | | increase your profits, we have a Free Special |
| œ16,542, National insurance Class 2 | | | | Report addressed to small businesses either |
| œ104and National insurance Class 4 | | | | starting up oralready in business. This Exclusive |
| œ1,806. Total œ18,452. Thebottom line | | | | Free Special Report isavailable automatically when |
| is that the person that has incorporated | | | | you subscribe to our regularseries of Free |
| hisbusiness into a limited company will make a tax | | | | Newsletters on finance advice and taxplanning by |
| saving of | | | | visiting our subscription area on our website |
| œ7,929 compared to a sole trader! Isn't that | | | | london.info. It is complied from reallife situations |
| fantastic? | | | | dealing with small business tax affairs forover 10 |
| Somebody might be wondering: why is this entire | | | | years and it is loaded with down-to-earth advice |
| happening? | | | | andpractical, understandable examples. |
| The official explanation is that, this government, | | | | LEGAL NOTICE |
| to helpthe economy grow, encourages people to | | | | Whilst every care has been taken in the |
| leave as much profitswithin their businesses to be | | | | preparation of thisarticle, the author cannot accept |
| reinvested, instead of beingtaken out and spent. | | | | responsibility for anyerrors or omissions. Proper |
| The "unofficial line" is that, as a matter of fact, | | | | professional advice should betaken at all times. |
| foryears the Inland Revenue has tried to | | | | We retain copyright for the contents of this |
| reclassify theself-employed. The 1% in NIC hike | | | | article. Anyunauthorized copying or onward |
| on staff salaries abovethe NIC threshold from | | | | distributions are prohibitedwithout our consent. |