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Tax Savings of Incorporation

Newsletter issue - July 09.

You can still save tax by operating your business through a company rather than as a sole trader or partnership, but the level of tax savings will depend on the range of salary, dividends and benefits that you want to take out of the company.

If you take a salary equal to the personal allowance of £6,475, and extract the rest of the profits as dividends, you could make the following tax savings in the current tax year. This salary level involves paying some NICs as the NIC threshold is £5,715, but a lower salary would waste part of the dividend tax credit. Salary is also tax deductible for the company whereas dividends are not.

For 2009/10 the following shows for different profit levels the tax payable as a sole trader, by incorporating as a company and the total saving...

Profits £15,000: Sole trader: £2,573 - Company £1,951 - Total saving: £622
Profits £30,000: Sole trader: £6,773 - Company £5,101 - Total saving: £1,672
Profits £50,000: Sole trader: £13,169 - Company £9,463 - Total saving: £3,706
Profits £100,000: Sole trader: £33,669 - Company £29,838 - Total saving: £3,831
Profits £150,000: Sole trader: £54,169 - Company £50,213 - Total saving: £3,956

There are other tax factors to consider. For example...

Tax rates are due to increase from 2010/11. Individuals will pay a top rate of 50% on income over £150,000 and the personal allowance will be withdrawn for those with income over £100,000. The tax rate paid by a small company will also rise to 22%. These changes will reduce the tax savings to be made by operating through a company. The calculations summarised as follows for 2010/11 assume a salary equal to a personal allowance of £6,635, which is reduced to nil when profits exceed £113,000.

Profits £15,000: Sole trader: £2,530 - Company £2,004 - Total saving: £526
Profits £30,000: Sole trader: £6,730 - Company £5,304 - Total saving: £1,426
Profits £50,000: Sole trader: £12,998 - Company £9,704 - Total saving: £3,294
Profits £100,000: Sole trader: £33,448 - Company £30,273 - Total saving: £3,175
Profits £150,000: Sole trader: £56,642 - Company £53,633 - Total saving: £3,009

Please talk to us about the savings possible for you. We can provide a calculation specific to your circumstances and outline the many other factors you will need to consider when incorporating.