This is an update from my previous post on this subject dated 28 November 2013 and as it is nearly two years since I last commented on this point, I thought it’s a subject that could do with an update.
I am basing my calculations on the tax rules that are intended to apply from 6 April 2016. This is because there are significant changes to the taxation of dividends from this date. See the following link to the blog post from the 20 July >>here
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).
I have also assumed that the business does not have any employees.
I have set out below the after tax income based on a number of income levels. In each case I have assumed that all the profits have been withdrawn from the business.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 the 2016/17 Tax Rates.
For the company calculation it is assumed that a salary of £10,800 is paid and the remainder of the after tax profits are paid as dividends. The savings are annual savings based on the 2016/17 tax rates.
After tax income as a Sole Trader:
Profits of £30,000 gives an after tax income of £24,185
Profits of £40,000 gives an after tax income of £31,285
Profits of £50,000 gives an after tax income of £37,456
Profits of £60,000 gives an after tax income of £43,256
Profits of £75,000 gives an after tax income of £51,956
Profits of £100,000 gives an after tax income of £66,887
Profits of £150,000 gives an after tax income of £91,136
After tax income as a Limited Company:
Profits of £30,000 gives an after tax income of £24,185 (a tax saving of £676)
Profits of £40,000 gives an after tax income of £32,261 (a tax saving of £976)
Profits of £50,000 gives an after tax income of £39,661 (a tax saving of £2,205)
Profits of £60,000 gives an after tax income of £47,061 (a tax saving of £3,805)
Profits of £75,000 gives an after tax income of £53,387 (a tax saving of £1,431)
Profits of £100,000 gives an after tax income of £66,456 (a tax saving of £431)
Profits of £150,000 gives an after tax income of £91,727 (a tax saving of £591)
What does this mean? If I am already a limited company should I become a sole trader?
There are less purely tax reasons to incorporate your business from 6 April 2016, for example the tax savings for a business making £50,000 a year in profits were nearly £3,700 a year. The tax savings are at the best for businesses earning around £60,000 but after this amount the tax savings are gradually eroded.
It does mean that there are no immediate reasons for a dis-incorporation if you are a limited company unless your profits are really small.
Are there any other considerations? Do not forget child benefit.
If you business profits are around the £60,000 mark it may still be worth incorporating your business.
A sole trader earning £60,000 would have their tax bill increased by the following amounts on the basis that child benefit is being paid:
One child £1,076.40
Two children £1,788.80
Three children £2,501.20
Four children £3,213.60
Trading as a limited company would eliminate these liabilities.