Trading as a company – does it still save tax?
The Chancellor is gradually cranking up the rate of tax on small companies over the next three years. This has important implications for deciding whether to trade as a company or an unincorporated business.
Recently, even the smallest of businesses could have benefited from trading as a limited company, but now the tide has started to turn. Companies with profits of up to £300,000 a year will see the tax rate on their profits rise by 1% to 20% for the year to 31 March 2008, and then another 1% in each of the following two years. Small companies will not benefit from the 2% cut to the mainstream rate in 2008.
Trading as a limited company and drawing profits mainly as dividends can still save you money because you will avoid national insurance contributions. However, at lower profit levels – below around £25,000 – the benefit may not be worth the cost and inconvenience of setting up and running a company. For example, on profits of £20,000, the saving is now only around £1,300. Future tax changes will erode this advantage even further.
At higher profit levels, incorporation remains generally worthwhile. For example, if your profits are £50,000, trading as a limited company could still save you nearly £4,000 – and more if you leave some of the profits in the company. The mainstream rate – currently paid by companies earning over £1.5 million a year – will fall by 2% for the year to 31 March 2009, but that is little consolation for smaller companies.
Tax is not the only factor in deciding whether to trade through a company. For example, limited liability can be very desirable, although this is also available through a limited liability partnership (LLP). We would be happy to evaluate and discuss the costs and benefits to you of incorporating or self-employment.