There are a number of good reasons for considering the use of a company or to incorporate your business. However, there are many factors to consider before doing so. The changes to the tax law may change this advice for some individuals. We would welcome the opportunity to talk to you about incorporation and your own specific circumstances in Bromley, Kent and London areas. Please do not hesitate to contact us at Adiva Accountant in Bromley for further advice.
Below we highlight potential disadvantages of trading as a company.
Administration
Companies have higher annual compliance requirements in terms of administration and accounting. So, the costs are usually higher for a company than for a sole trader or a partnership. Companies Act dictates the format in which the annual accounts need to be prepared. And in certain circumstances, the accounts need to be audited by a registered auditor. Details of the directors/shareholders are filed on the public register held by the Registrar of Companies.
Privacy
The annual accounts have to be made available on public record. However, these can be modified to minimise the information disclosed.
PAYE/Benefits
As a company, if you pay directors or staff, you will need to complete PAYE records for salary payments. And you have to submit details of salary payments on a timely basis under PAYE Real Time Information. Also, you will need to keep records of expenses reimbursed to you by the company. Therefore, P11D forms may have to be completed.
Dividends
A system needs to be set up for you to correctly pay dividends, if you will require regular payments from your company.
Business owner transactions
The owner of an unincorporated business may introduce funds to and withdraw funds from the business without tax implications. For the owner/director of the company there may be tax implications on these transactions.
Director’s responsibilities
A company director may be at risk of criminal or civil penalty proceedings. These can be for late filing of accounts or for breaking the insolvency rules.
Below are some other non-tax advantages of incorporation.
Limited liability
Normally operating as a company provides limited liability. If a shareholder’s shares are fully paid, he cannot normally be required to invest any more in the company, or be liable to company’s debts. However, banks would often require personal guarantees from the company directors for borrowings. The director is not usually liable to company creditors.
Legal continuity
A company is separate from its owners (the shareholders) and will enjoy legal continuity as it is a legal entity in its own right. The company can own property, sue and be sued.
Transfer of ownership
It is easier to transfer the ownership of the business, in comparison to a business which is not trading as a limited company.
Credibility
The corporate status is often deemed to add to the credibility or commercial respectability of the business.
Borrowing
Companies can usually borrow more against the assets of the business. This is possible as normally a bank is able to take extra security by means of a ‘floating charge’ over the assets of the company.
Pension
The company could establish an approved pension scheme. This may provide greater benefits than the self-employed schemes.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley to discuss all the advantages of operating as a company.
Capital gains
When you incorporate your existing business, it will involve transferring at least some of your assets (e.g. goodwill) from your sole trade or partnership into your new company. You need to be careful as the transfer of goodwill may create a significant capital gain. If the business is transferred in exchange for shares in the company, it is possible to defer the gain until any later sale of the company.
Changes to relief for goodwill
Generally, individuals were prevented from claiming Entrepreneurs’ Relief (ER), where goodwill was sold to the company for cash or debt on or after 3 December 2014. So, capital gains tax arises on the gain made. The exception is that a claim to ER is allowed for partners in a firm who do not hold or acquire any stake in the successor company.
New legislation to be introduced in Finance Bill 2016 will revise the restriction on the claim for ER on goodwill on incorporation. Where the individual claiming relief holds less than 5% of the shares and the voting power of the acquiring company, ER can be claimed in respect of goodwill.
Also, if the transfer of the business to the company is part of arrangements for the company to be sold to a new, independent owner. Then relief will also be due where an individual hold 5% or more of the shares or voting power.
These changes will be backdated to disposals on or after 3 December 2014.
Stamp Duty Land Tax (SDLT)
You need to consider SDLT charges when assets are transferred to a company. Goodwill and debtors do not give rise to a SDLT charge, but land and buildings may do so.
Income tax
When ceasing a business in an unincorporated form, you need to consider various issues including ‘overlap relief’.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the goodwill relief, overlap relief and other reliefs available.
Corporation tax rate
Profits of the company are taxed at 20%.
National Insurance
The rate of employees’ NIC is 12%. That is applied to all the earnings between the lower and upper earnings limits (Between £8,060 and £43,000 for 2016/17). In addition, a 2% charge applies to all earnings over the NIC upper earnings limit (£43,000 for 2016/17). For 2016/17 the rate of NIC for the self-employed is 9% for profits between £8,060 and £43,000, and 2% on profits above £43,000.
It is possible to avoid all the NI contributions by incorporating your business. You will be able to take a small salary up to the threshold at which NI is payable, and then taking the rest of post-tax profits as dividends.
Pension
It is possible for the company to make pension contributions on behalf of directors/employees (subject to limits) to a registered fund. This is irrespective of the salary level, but provided it is justifiable under the wholly and exclusively rule. These contributions are allowable expense for companies, but they are deemed to be a private expense for sole traders or partners.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the tax, national insurance and pension implications of trading as a company.
In our opinion, there is still beneficial for a director/shareholder to take a dividend rather than an increase in salary. Under the new rules the amount of the tax saved will be less than before, but is still beneficial.
Company vs Partnership
The table below gives an indication of the 2016/17 tax savings that may be achievable for husband and wife who incorporate their business compare to being in a partnership.
| Profits | £30,000 | £50,000 | £100,000 |
| Tax and NI payable: | £ | £ | £ |
| As partners | 3,140 | 8,940 | 25,260 |
| As company | 2,775 | 7,619 | 20,617 |
| Potential saving | 365 | 1,321 | 4,643 |
The amount of the potential savings depends on the relevant circumstances of the couple’s tax position. So, they may be more or less than the above figures. The above examples are computed on the basis that the couple:
- share their profits equally
- have no other sources of income
- both partners/directors take a salary of £8,060 from the company with the rest (after tax) paid out as a dividend.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the possible tax savings of trading as a company.
You may think that since the dividends tax changes to trade as a sole trader, or a partnership may now be a better option than to trade as a limited company. However, in our view, there is still a benefit in tax terms for most circumstances to continue to trade as a limited company. From April 2016, the tax saved by incorporation compared to being unincorporated is lower than before. However, there is still an annual tax saving.
A company can be used for:
- a profitable trade or
- buy-to-let properties
From 6 April 2016:
- The 10% dividend tax credit has been abolished with the result that the cash dividend received is the gross amount potentially subject to tax.
- New rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
- A new Dividend Tax Allowance will remove the first £5,000 of dividends received in a tax year from taxation.
The table below shows a comparison between the pre and post 6 April 2016 dividend tax rates.
| Dividend falls into | Basic rate band | Higher rate band | Additional rate band |
| Effective rate before 6 April 2016 | 0% | 25% | 30.6% |
| Rate from 6 April 2016 | 7.5% | 32.5% | 38.1% |
As always there are winners and losers from these changes to taxation of dividends.
Winners
A higher rate taxpayer who has dividend income of £5,000 or less, will be better off under the new rules. Under the prior rules, they had a tax liability of up to £1,250 (25% of £5,000). However, under the new rules they will have no tax liability at all.
Losers
The sole shareholder of a company who takes a small salary and then dividends up to the threshold at which higher rate tax is payable, will be worst off. Under the prior rules, they would have no tax liability on the salary (as the salary is below the personal allowance), and no tax on the dividends. Under the new rules, only £5,000 of the dividend will not be taxable. If the shareholder fully utilises his basic rate band in 2016/17 in the most tax efficient way, still would have a tax liability. The minimum tax liability for 2016/17 would be £2,025, compare to Nil in 2015/16.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the possible tax implications of the changes in dividends taxation.
Usually if you run your business as a company, you may save a considerable amount of tax. However, in certain circumstances this may not be the case, and a sole trade or partnership structure may be better. If your business is in Bromley, Kent and London areas we, at Adiva Accountant in Bromley, can show you the potential tax savings from trading as a company.
The decision to run your business as a company, a sole trader or partnership is an important one. Here we cover the relevant tax issues and describe the possible tax benefits from operating as a company.
The recent changes to the taxation of dividends
From April 2016, there have been significant changes to the taxation of the dividends. The dividends are now taxed at a higher rate, which has reduced the tax savings compare to prior years. Our calculations show that incorporation in 2016/17 and beyond should still result in lower tax bills than remaining unincorporated. If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the possible tax savings from operating as a company.
