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the most important benefit is the control the director/shareholders get of when and how much higher rate tax to incur- if your income can be £.5m in one year and well under £100k for later years then a plain vanilla limited co has to be the sensible structure
Another consideration is the age of the client. If they are approaching pensionable age then you need to factor in that they will no longer pay NIC. There is no upper age limit on dividend tax.
[quote=jon_griffey]
Another consideration is the age of the client. If they are approaching pensionable age then you need to factor in that they will no longer pay NIC. There is no upper age limit on dividend tax.
There are many factors to consider when looking at this question. Whilst this article processes the 'raw numbers' in the most simple case of total withdrawal of all profits and is useful to that extent, practitioners should be aware of the clients full circumstances and preferably future plans when advising on whether to incorporate or not.
I have some clients that leave some of the profits within the company, some that only withdraw what they need, and others that take out everything (and sometimes more, always fun to explain what they need to do to fix that- spend less!). Each of them is different.
If you draw a salary up to the amount of the personal allowance this will trigger a liability to NIC at 12% but will save CT at 20% and as long as you are still able to claim the Employer's NIC allowance will produce a further small saving
With the introduction of the new dividend tax, there is a lot of apprehension among people. In the previous system, basic-rate taxpayers were exempted from paying any tax on the dividends but higher-rate taxpayers were charged a tax at a rate of 25 per cent and additional-rate tax payers pay 30.56 per cent. Learn more at http://goo.gl/T67rb9
Retention of profits and a capital gain on exit route still makes this structure appeal more than sole trade to many given the lower CGT rates. As long as you don't fall foul of the anti-phoenixing rules of course.
Retention of profits and a capital gain on exit route still makes this structure appeal more than sole trade to many given the lower CGT rates. As long as you don't fall foul of the anti-phoenixing rules of course.
It's not just the anti-phoenixing rules rules you have to worry about. They're also widening the scope of the transactions in securities legislation to catch so-called "money-box" companies where the main reasons (or one of the main reasons) for the liquidation was to avoid tax.
Notwithstanding this, there are still many good tax reasons (plus a few non-tax reasons) why a company might remain the better choice, even if you take all your profits as dividend and make more than £150k.
For instance, employer-supported childcare is ending soon. Young parents working through their own limited company might be better off using their own vouchers scheme rather than the new Government vouchers.
I was at the ICAEW Tax Faculty conference and they were saying that the magic number for self-employment v. single person limited company was profit of £55,000. This article backs that up which is encouraging.
Anyone for a partnership?
My guess is that it depends on the size of the Bill you are going to give him - at £30,000 the saving is just over £1,000 so I'd guess the firm that made the calculation plans to charge about £1,800?
As others have suggested Tax is only one consideration for incorporation. The main one being the preservation of personal assets if the company goes bust.
Its no good saving tax if you lose your home because of business problems
I agree with all Matt's calculations but would add that many director shareholders who take salary of say £8,000 are in a position to benefit from the savings rate band and the personal savings allowance. If they have financed the company by way of loan then interest of eg £6,000 could save a further £1,560 for a basic rate director and over £1,200 for a higher rate director.
can someone please help me out here - where does Tim's £1,560 come from - yes i do subscribe to the excellent Tax TV too
The net income increases by £6,000 of tax free interest but reduces by the dividend reducing by £4,800 (the £6,000 less 20% CT) but the reduction in dividend saves tax at 7.5% ie £360. Net saving £1,560.
Have a look at https://www.absolutetax.co.uk/products/absolute-taxpert-apps for my new calculator!
You would have to ensure that you fully understand your clients position before advising here. Given the nature of how limited companies work tax wise, it is very unlikely that all post tax profits will be drawn from a company and as such any comparisons being made may be against self employment should be done so with careful consideration.
As part of the decision, to what degree has anyone looked at or used Company pension Contributions to reduce, or eliminate, CT?
I agree with Derek that the pension contribution factor needs to be addressed as part of the equation. Thus the age and pension build -up position is relevant.
Unfortunately many people are forced to incorporate by their clients (e.g. contractor agencies almost never allow sole traders or other formats such as LLP), so the question is largely academic.
This is a useful over view. It is simplistic, but a simplistic view is always useful so that the needs of individual clients can be built in to develop the model. We do need to remember that each client will be different and that one model cannot answer all client needs.
The age of the client is important, and we should also remember that pension contributions can be made out of a LTD on which CT relief can be gained and which can be taxed as income on the individual when the pension is received. The dates of receipt can now be planned to a certain extent to be as tax beneficial as possible.
An interesting amendment to the model would be the introduction of a share holding company into which to collect the dividends from the profit making company. This can then be used to defer the transfer of dividends to the "owner" in order to plan the incidence of tax. This can be useful when the various "owners" are not related and are of different ages.
Another aspect that should be considered is the charging of interest on loans to the company by "owners".
I often find that any tax saving on incorporation is blown out of the water when you start looking at funding the business vehicle. The problem often stems from ambitious private use adjustments for the unincorporated business.