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Taxation
One of the most common reasons for incorporation is to save tax. Recent changes in small-company tax have reduced the potential benefits for those with low profits but there are still savings to be made at relatively modest levels.
Care is required as the rates of national insurance are much higher for a limited company than for a sole trader or partnership and there is much less flexibility. Directors of limited companies may also suffer increased tax charges on benefits in kind provided by the company than would be suffered if the business was unincorporated.
In good tax planning a suitable combination of salary (as a reward for directorship) and dividends (as a reward for ownership) can maximise the benefits available in the current tax climate.
The timing of tax payments differs between the incorporated and unincorporated business. Tax is paid on directors' salaries almost immediately. However a limited company pays its corporation tax later than individuals pay tax on business profits. The benefits to be gained on timing therefore depend on the correct structuring of the limited company.
Capital gains
Limited companies pay tax on capital gains on the same basis as profits. For small companies this will probably mean a maximum tax rate of 21%. Individuals can make small gains each year free of tax and, on business assets, may pay tax at only 10%. This is very complex area and qualified, professional advice is essential when determining the most effective business structure.
Conclusion
This leaflet can only provide a general guide to incorporation and is not a substitute for expert professional advice. See a CA!
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