Operating your business as a limited company instead of a sole trader or partnership can have a number of benefits, not least of these being a range of opportunities to save tax.
The headline rate of corporation tax on a company with profits of up to £300,000 is 20%. Compare this to a sole trader who will pay tax at 40% on profits over £42,475.
Profit Extraction –many company owners draw a small salary from their company, and take the rest of their income as dividends. This can be done in a very tax efficient manner, often saving thousands of pounds when compared to the tax paid by a sole trader/partner.
Further Savings with Spouse/Partner –many company owners involve their spouse/partner in the business in some way e.g. shareholder or employee. This can be used to produce significant tax savings.
Less Tax on Profits Retained in the Company –if some profits are retained within the company (and possibly reinvested) the only tax paid is the 20% corporation tax highlighted above. Building the value of the company in this way, possibly with a view to a future sale, can again be extremely tax efficient.
And Finally –unlike sole traders, who are taxed each year on all of their business profits, company owners and directors usually have a choice of how and when they draw money from the company. In this way they have complete control over their personal income tax bills and liabilities.
Patrick Evans is a Director at Optimus Accounting Limited. For a free initial consultation, or to discuss any of the points above, please call 01289 330311 or email firstname.lastname@example.org
Optimus Accounting Limited
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