One of the most common questions that we get asked is ‘Should I run my business through a limited company?’ Whether or not it would be beneficial to will depend on a number of factors, the nature and size of your business being just two of them.
– There are attractive potential tax savings to be made. A small owner managed limited company will pay corporation tax at 20% on its profits. The director / shareholder’s personal tax liability will depend on how much money is withdrawn from the company and in what form. A salary (or remuneration) will be subject to PAYE but will be a tax deductible expense for the company. Dividends are not tax deductible but come with a 10% tax credit and do not attract National Insurance. This is where a major personal tax saving can be made. A small salary with the balance taken in dividends should keep your personal tax bill to a minimum.
– The company will have limited liability. This gives the owners (shareholders) of the company protection if the company fails. The shareholders liability is normally limited to the amount that they have already paid for their shares.
– The public perception of your business can be improved.
– Certain details are kept on public record at Companies House. This will include information submitted on the annual return (a document that confirms who the directors / shareholders etc. are) and your annual accounts (although small companies are entitled to file limited abbreviated accounts information).
– There is an additional administrative and legal burden. The company’s directors must make sure that the company is managed in accordance with its articles of association and company law. Filing requirements with regard to the annual return and annual accounts must be met, and the accounts must be filed on time to avoid penalties.
– More detailed accounting records will need to be kept. As a sole trader you may be able to prepare just an income and expenditure account each year. A company will have to prepare a profit and loss account, a balance sheet and notes to the accounts too. The accounting records should always be kept up to date. You may have to purchase a software package to help you keep your records.
– If you are to be paid a salary a payroll scheme will need to be set up and run in accordance with the new RTI (real time information) regulations.
– Rules regarding expenditure can be different. For example, as a self-employed individual you may be able to claim a % of your motor expenses each year. If you run your business through a limited company, you will need to decide whether you want the company to own the car (the company can then pay for 100% of the running costs, but you will be taxed personally on the benefit of having a company car), or own the car yourself and claim the tax free mileage rate for every business mile that you drive.
– Additional reporting requirements – If you incorporate you may have to produce and / or file all of the following: Full accounts (for the members), abbreviated accounts (for Companies House), Corporation tax return form (for HMRC, this has to be filed on-line), personal tax return.
Potential tax savings:
This is an estimate of the total tax you could save per annum by running your business through a limited company. It is only an estimate; savings will vary depending in individual circumstances.
Profit : tax saving
£50,000 : £3,300
£75,000 : £3,800
£100,000 : £4,300
£200,000 : £7,500
£300,000 : £10,000
£500,000 : £10,000
£1,000,000 : £10,000
The potential tax savings can be significant and is the reason many people ask the question. It’s not the only thing to consider though. If you would like to discuss the implications with regard to your particular business, please do not hesitate to contact us.
Graham Berry FCCA – 11 September 2013
The content of this article is intended for general guidance only . No responsibility for loss by any person acting or refraining from action as a result of this article can be accepted. We cannot assume legal liability for any errors or admissions this article may contain.