To incorporate or not to – that is the question!
‘To incorporate or not to – that is the question’ is a guest post for business owners.
I am doing perfectly well as I am, I don’t employ anyone directly and life is simple and clear. My accountant charges me very little and whatever I earn goes straight into my account. Why on earth would I want to complicate things by forming a limited company?
Well, the answer is that it doesn’t necessarily suit everyone and for many it may well be best to leave things as simple as they are. We are always very careful in advising people that it is above all a personal choice
There are several considerations that need to be taken into account.
First of all there is the tax angle:
- Companies pay tax at 20% whereas personal tax rates go up to 45% and sometimes higher. Working through a company therefore allows you to regulate your taxable personal income. In other words only pay higher rate tax on income that you need to take out and spend. Where you earn more than you spend the balance can be held in the company and you pay only 20% for the time being.
- Where your earnings are above £100,000 there is a band of income between that figure and £121.200 at which the effective actual rate is 60% because your personal allowances are gradually withdrawn. Having a company can allow you to avoid this very expensive trap by regulating what you take out. The key question is whether or not you spend everything you earn. If that is the case then the one of the key advantages falls away
- Unless of course you can move income to your partner. If you are in a steady, trustworthy relationship, the opportunity arises to gift a proportion of the company to your other half so that if they are not paying higher rate tax, you can shelter up to £42k of your income form higher rate tax by using their lower rate allowance. Allocating £30k as a dividend in this way could save you £7.5k in tax if you are a higher rate tax payer.
- If you are not sure about whether or not you want to give away a big chunk of your company you can always pay your other half for services that are properly rendered. Gone are the days I am afraid where you can just vote £30k to your partner for “secretarial services”. There needs to be a commercial justification for any such arrangement.
- Don’t forget of course the advantage of limited liability. If you are happy that everything your business owes is what you owe personally, that any business liability will be yours personally, then Limited Liability holds no attraction. For many, that is not the case.
- One of the problems we often hear from “sole traders” is that their income is volatile and unpredictable. Working through a company allows you to regulate your income. What you earn goes into the company’s account and this acts as a filter. You pay yourself a regular monthly income calculated to cover your basic monthly costs and the balance can be held in the company to cover months when your earnings are below average.
One of the major advantages of incorporating a sole trade has now unfortunately been abolished. Until December 2004 it was possible to sell the goodwill of your trade to a New Company formed for the purpose. If you were able to place a value of say £1m on that goodwill the company would as a result be able to distribute £1m to you free of tax being the amount that it owed you personally on incorporation. Those days are now passed!
What more does it cost to run a Company? Well your accounting fees will increase as you will have to have statutory accounts prepared once a year and Corporate Tax Computations as well as your personal Income Tax Return. HMRC also now requires you to have your accounts tagged in iXBRL so that will be something else your Accountants will charge for. On the whole I would say that your accounting fees will probably double. However at the end of the day, if there are significant tax savings to be made, dare we say that it might well be worth paying your accountant a little more to save significantly more tax?
Christopher Jenkins is Senior Partner at Ecovis Wingrave Yeats, an Award winning Firm of Accountants and Business Advisers based in London W1 that he founded. He has been Voted Best Business Adviser by the CBI in their Awards for Excellence. Contact him at www.wingrave.co.uk
‘To incorporate or not to – that is the question’ is a guest post on a business theme and the views here do not necessarily concur with those of Investment Quorum. In fact it is very often the case that we may be largely in disagreement but we respect the opinions and views of others and value their contribution to the debate. Guest posts may appeal more to some than others and may often have an industry or sector knowledge expectation.
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