Minimising the overall tax is a key aim for all businesses.
Despite the Government’s attempts to increase the corporation tax assessed on small limited companies, the tax benefits of trading through a limited company still remain attractive for businesses with modest profits.
The basis of taxing small company profits over 2009/2010:
1 Apr 2009 to 31 Mar 2010 – Profits up to £300,000 taxed @ 21%
|
Annual Profits
|
||||
|
£15,000
|
£30,000
|
£60,000
|
£100,000
|
|
| Sole Trader | ||||
| National Insurance | ||||
| – Class 2 |
125
|
125
|
125
|
125
|
| – Class 4 |
743
|
1,943
|
3,214
|
3,614
|
| Income Tax | ||||
| – 0% |
0
|
0
|
0
|
0
|
| – 20% |
1,705
|
4,705
|
7,480
|
7,480
|
| – 40% |
–
|
–
|
6,450
|
22,450
|
|
total
|
£2,573
|
£6,773
|
£17,269
|
£33,669
|
| Limited Company | ||||
| Corporation Tax | ||||
| – 21% |
1,950
|
5,100
|
11,400
|
19,800
|
| Income Tax | ||||
| – 40% |
–
|
–
|
2,129
|
9,959
|
|
total
|
£1,950
|
£5,100
|
£13,529
|
£29,759
|
|
potential tax saving:
|
£623
|
£1,673
|
£3,740
|
£3,910
|
Remeber:
In the above comparison it is assumed company profits are extracted first by a salary of £5,715, with the remainder drawn as dividends from single company and proprietor receives no other taxable income.
As well as the amount of direct taxation due on profits, businesses should consider a number of further issues before deciding which of the two trading mediums is most appropriate:
If minimising the taxation on profits is a key concern, and these profits are modest, trading as a private limited company, as opposed to being a sole trader or partnership, is still an attractive option.
The decision of which trading medium to trade through should be based on many factors, and will usually require professional guidance.
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