One reason business owners think that having a company will be good for them is that they have heard they can save tax this way. Tax and national insurance is different for business owners operating from a Limited Company compared to acting as a sole trader or in a partnership.
Most owners choose to draw their income as a dividend to achieve these savings. This is because taking income entirely in the form of salary will incur not only income tax at your relevant tax rates, and employee’s national insurance but employers’ national insurance too. Employers National Insurance is 13.8% beyond £8,164 and can bring your tax and NI rate in total to more than 45.8%!
So incorporating your business should be at a time when profits will continue to be made so that drawings can be taken as dividends not salary.
But things have changed recently with dividends taxed more highly. This is the situation for tax year 2017/18 and 2018/19.
|Zero Rate Dividend Band||£5,000||ZERO|
|Basic Rate Band||£5001 - £33,500||7.5%|
|Higher Rate Band||£33,501 - £150,000||32.5%|
|Additional Rate Band||£15,000+||38.1%|
Effectively this means that if you are currently trading as a sole trader or a partnership you will save the National Insurance you are paying, you will pay company tax of 19% on the profit you make in your company and you will pay the above rates on your dividends from the Company.
Currently the savings on incorporation are around £1600 pa
for a business making £58k income before tax.
Change for 2018/19
From 6th April 2018 this will reduce as the Zero rate band for dividends reduces to £2k incurring extra tax of £975 reducing the saving to less than £1,000.
Going into an incorporation and coming out of one has costs attached too so making the right decision for you is very important. It is important to do the calculations for yourself to check whether you will benefit.
For an overview of whether incorporation would be right for you see our blog which includes an explanation of the additional regulatory and administrative costs you will incur. Read more about the benefits of incorporation .
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