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Tax impact of incorporating my side business

Should I incorporate my side business and does it impact my digital nomad plan?

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TLDR summary - I'm a high rate taxpayer due to salary with additional business income. I'm maxing pension contributions this tax year to reduce taxable income to minimize tax at higher tax rate. Should I incorporate my side business now or after the tax year? Will this impact my future plan to be a digital nomad in a few years after I quit my job?

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Hi all,

I'm considering paying for tax advice but I wanted to first get thoughts from others to initially help me prepare. A few key points:

- I've always been UK tax resident.
- I receive employment income of £90k including pension and bonus.
- I started a digital side business and I'm hoping to will continue to make a significant profit (£60k+) each year for the next few years.
- I'm currently registered as a sole trader and not incorporated.
- I will max out my available pension contributions this tax year, including for the last 3 years of allowances remaining. This will bring my income down to just the higher rate income threshold for this year so I will have minimal amount taxed at the higher rate.
- There are minimal legal risks to my side business so the limited liability of a limited company isn't useful to me.
- I don't expect to hit taper relief limits in any tax year.

Q1) Is there much financial benefit to incorporating now rather than immediately after the tax year? I think I would get a NI saving of 2%, which I don't think is currently sufficient for the extra admin and current lack of time.

Q2) I believe I should incorporate at least after this tax year so that that future profits will only be initially taxed at 19% corporation tax rate rather than 42%. Then when I retire early (hopefully in a few years), I can extract the profits at a lower rate with my personal allowance. Is there a better way to structure this to get a lower tax rate? Others tell me that they are just taxed at 10% on their business profits but I have no idea how this would usually be possible considering the corporation tax rate is 19% so presume it's specific to their circumstance (or maybe entrepreneur relief?).

Q3) I'm expecting to stop work by April 2023 and become a digital nomad changing country every month and not spend any time in the UK for the next few tax years after then. Obviously this would have a large amount of possible tax implications across different countries but, ignoring those, would I easily be able to unincorporate and become a sole-trader again without a big tax liability coming up? Is there anything I need to consider on incorporation that impacts this? I'm considering this now as it may enable me to become non-UK tax resident when travelling and save me from UK income tax. Of course digital tax laws may well change by then giving the current interest!

Appreciate this is something I will need to discuss with a tax advisor but it would be useful to get some ideas first.

Thanks!

Replies (4)

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By Tax Dragon
01st Aug 2020 13:08

Apart from ER (now BADR), you don't mention capital taxation.

When you take advice, make sure it covers off those aspects.

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RLI
By lionofludesch
01st Aug 2020 14:34

I'd take the "taxed at 10%" with a pinch of salt. Yes, it's possible if you keep winding up companies and opening new ones but, it's a bit of a ballache and (relatively) recent legislation means that you'll need to stop trading in that particular or similar field for a couple of years.

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My photo
By Matrix
01st Aug 2020 14:42

“Taxed at 10%” is in addition to the corporation tax at 19%.

You can leave the money in the company if you wish, your tax adviser will be able to advise on the optimal profit extraction when they have all the facts.

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avatar
By CS777
01st Aug 2020 15:15

ConfusedTaxAccountant wrote:

TLDR summary - I'm a high rate taxpayer due to salary with additional business income. I'm maxing pension contributions this tax year to reduce taxable income to minimize tax at higher tax rate. Should I incorporate my side business now or after the tax year? Will this impact my future plan to be a digital nomad in a few years after I quit my job?

======================

Hi all,

I'm considering paying for tax advice but I wanted to first get thoughts from others to initially help me prepare. A few key points:

- I've always been UK tax resident.
- I receive employment income of £90k including pension and bonus.
- I started a digital side business and I'm hoping to will continue to make a significant profit (£60k+) each year for the next few years.
- I'm currently registered as a sole trader and not incorporated.
- I will max out my available pension contributions this tax year, including for the last 3 years of allowances remaining. This will bring my income down to just the higher rate income threshold for this year so I will have minimal amount taxed at the higher rate.
- There are minimal legal risks to my side business so the limited liability of a limited company isn't useful to me.
- I don't expect to hit taper relief limits in any tax year.

Q1) Is there much financial benefit to incorporating now rather than immediately after the tax year? I think I would get a NI saving of 2%, which I don't think is currently sufficient for the extra admin and current lack of time.

Q2) I believe I should incorporate at least after this tax year so that that future profits will only be initially taxed at 19% corporation tax rate rather than 42%. Then when I retire early (hopefully in a few years), I can extract the profits at a lower rate with my personal allowance. Is there a better way to structure this to get a lower tax rate? Others tell me that they are just taxed at 10% on their business profits but I have no idea how this would usually be possible considering the corporation tax rate is 19% so presume it's specific to their circumstance (or maybe entrepreneur relief?).

Q3) I'm expecting to stop work by April 2023 and become a digital nomad changing country every month and not spend any time in the UK for the next few tax years after then. Obviously this would have a large amount of possible tax implications across different countries but, ignoring those, would I easily be able to unincorporate and become a sole-trader again without a big tax liability coming up? Is there anything I need to consider on incorporation that impacts this? I'm considering this now as it may enable me to become non-UK tax resident when travelling and save me from UK income tax. Of course digital tax laws may well change by then giving the current interest!

Appreciate this is something I will need to discuss with a tax advisor but it would be useful to get some ideas first.

Thanks!

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