To incorporate or not to incorporate
Along with the England flags being put away the emergency budget is becoming rapidly forgotten but if you are in business you shouldn’t be so hasty to ignore it.
One of the main headlines to come out of the budget was the reduction in the Corporation Tax rate by 1% making the Small Companies rate 20% from April 2011. This was good news for business owners but of course it only applies to those which are incorporated. Those who operate their business as either a sole trader or partnership are subject to Income Tax and National Insurance on their business profits so will instead be hit by the rise in National Insurance rates from April 2011.
The changes in the Corporation Tax rate and National Insurance rate along with forecast reductions in the basic rate threshold for individuals poses the usual question of should those in business consider incorporating and is it beneficial for everyone to do so?
Indicators do strongly suggest that it is widely beneficial for most owner managed businesses to incorporate and when doing the sums at the new rates from April 2011 the tax savings as a result of incorporation increase even more.
By operating as a limited company it will mean the business profits are taxed at corporation tax rates. The business owner is only individually taxed on the profits they actually withdraw from the business which it is generally more beneficial to do in the form of dividends. Only a minimal salary is then drawn so minimising the amount of National Insurance paid. As the National Insurance rate is to rise the savings which can be made increase.
There have been many attempts to try to curb the incorporation trend in the past due to the tax savings which can be made and the thought that business owners are not paying the ‘right amount of tax’, an opinion previously expressed by Gordon Brown and we are sure HMRC will continue their plight to ensure that businesses do not flout the tax laws. Careful consideration should therefore always be given to incorporation and expert advice sought. It is not always the right choice for everyone and other factors come into play such as legal liability, increased regulation, disclosure of financial information and future business plans such as sale of the business but it is always worth thinking about.
Biggleswade Chronicle - 2 July 2010