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Article: The 2002 Budget has put forward
some very tempting arguments for forming a Limited
Company or the incorporation of small businesses,
not least of which is the tax free first £10,000 of
profits. Before all you self-employed
rush in to incorporation you should consider the pros
and cons very carefully and speak to your
accountant. Just bear in mind that:
- The Chancellor has for several
years now been trying to re-classify as many
self-employed as possible as employees, and
these new measures are a further phase of this.
- The 1% increase in National
Insurance Contributions from April 2002 adds to both
employees' and employers' costs and anyone
incorporating will end up paying both!
- As a director you can pay
yourself in dividends as well as a salary, and
dividends are not subject to NICs.
- You need to achieve the right
balance between dividends and salary to maximise
the tax advantages and if you pay yourself too much
in dividends the taxman may argue your salary bill
should be higher - about 50-50 is generally
acceptable.
- You can retain and roll-up
profits in the company. This means you will pay
corporation tax, but his is a lower rate than both
lower and higher rates of income tax.
- Providing the company is over 2
years old there is only 10% capital gains tax
on asset gains.
- There is an increased
administrative burden with a company vis-à-vis
self-employment and therefore your accountancy bills
are likely to be higher.
- You would need to change all
your stationery so that it includes the full company
name, its number and registered address.
- You need to remember that the
public will have access to your accounts through
your returns to Companies House.
- On the other hand, incorporation
protects your personal assets, and in these days
of claims and litigation for all sorts of reasons it
can be a powerful incentive for peace of mind.
- For Landlords and property
investors there's also the question of whether you
incorporate the assets of your business, i.e.
the properties themselves.
Having said all this, there are still
some convincing arguments pro incorporation in many
circumstances.
However, the tax advantages will vary
and a lot depends on how much you need to take out of
the business each year. You need to consider all the
pros and cons very carefully coupled with advice from
your accountant.
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