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Business Newsletters - Summer 2007
Should I Ditch the Company?
This is what you may think following the tax changes for small companies announced in the Budget. The corporation tax rate for small companies with profits of up to £300,000 has already increased to 20%, and it is due to increase again in April 2008 to 21%, and once more in 2009 to 22%.
These corporation tax changes for small companies are intended to discourage businesses from incorporating just to save tax, as the corporation tax rate will be higher than the basic rate of income tax (20%), which will apply on all profits of up to around £40,500 (not allowing for inflation) by 2009. However an individual also has to pay Class 4 national insurance (NI) at a further 8% on his self-employed profits, in addition to the income tax due.
To assess the overall effect of these different tax charges, consider a business making profits of £55,225 in 2009. If it operates as a company, after paying a salary of £5,225 to the director, there is £50,000 to be taxed at 22%, giving a tax bill of £11,000. Trading as an individual with the same profits, the total income tax and NI payable will amount to approximately £16,000. This assumes the basic rate band and NI thresholds increase as the government has indicated.
The tax saving for operating the business as a company is thus expected to be about £5,000 per year. However these funds are held within the company, and transferring the money to the shareholder can create a further tax charge, if the shareholder pays higher rate tax.
If you are considering forming a company, or want to go back to being self-employed, please come and talk to us first so we can help you work through the numbers. There will be a different answer for each business.
