This is an update from an original blog post dated 25 October 2011. It has been two years since I last commented on this point and I feel it is a subject that is worth revisiting.
There are a number of legal and business issues to consider before you decide to incorporate, but here we will just look at the tax issues (ignoring things such as business use of cars).
The different tax bills are as follows. In each case I have assumed that all the profits have been withdrawn from the business. The tax bills include Class 4 National Insurance for the self-employed. These are based on 2013/14 Tax Rates.
Tax Bills as a Sole trader:
- Profits of £25,000 give a £4,664 tax bill
- Profits of £30,000 give a £6,114 tax bill
- Profits of £35,000 give a £7,564 tax bill
- Profits of £40,000 give a £9,014 tax bill
- Profits of £45,000 give a £10,926 tax bill
- Profits of £50,000 give a £13,026 tax bill
- Profits of £60,000 give a £17,226 tax bill
Tax bill as a Company:
- Profits of £25,000 give a £3,462 tax bill (saving £1,202)
- Profits of £30,000 give a £4,462 tax bill (saving £1,652)
- Profits of £35,000 give a £5,462 tax bill (saving £2,102)
- Profits of £40,000 give a £6,462 tax bill (saving £2,552)
- Profits of £45,000 give a £7,462 tax bill (saving £3,464)
- Profits of £50,000 give a £9,328 tax bill (saving £3,698)
- Profits of £60,000 give a £13,328 tax bill (saving £3,898)
In my view, every sole trader business with profits over £35,000 should give serious thought to incorporation.
If your household is entitled to child benefit then the reasons for incorporation are even more compelling.
A sole trader earning £60,000 would have the tax bill increased by the following amounts on the basis that child benefit is being paid:
- One child £1,055.60
- Two Children £1,752.40
- Three Children £2,449.20
- Four Children £3,146.00
This extra tax would be halved if the business was incorporated.
If you feel we can help in any way, please don’t hesitate to contact me