The 2002 Budget has put forward some very tempting arguments forforming 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 shouldconsider 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 theassets 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.