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Helen Rowe Accountancy Tax and Repor7ng Summary
Sole Trader Limited Company
Income Sources
Business Profits are taken as personal income
Company pays you a salary as an employee Excess profits can be distributed to shareholders as Dividends
Tax
Income tax on taxable profits of your business Na:onal Insurance Class 2 and Class 4
Employees pay PAYE and NI on salary Higher rate taxpayers pay addi7onal tax on dividend income Corpora:on tax on taxable profits, employers NI on salaries
Repor7ng
No requirement to prepare or file accounts, a simple tax return is submiNed to HMRC Accounts are private and only visible to the owner, your accountant and HMRC
File formal annual accounts as per the Companies Act and an Annual Return at Companies House (public record) HMRC require a Company Tax Return and Tax Computa7ons with full accounts which must be submiNed using its own or specialist soRware Increased accountancy fees
Helen Rowe Accountancy
Sole Trader Limited Company Personally liable for all debts of the business Shareholders are not personally liable for the
debts of a Company
Can use a personal bank account Must open a business bank account (fees)
Can offset any trading losses against other income in current or prior years
Can offset trading losses against its other income but not against your income as an individual. Can only carry forward any losses.
Can withdraw cash without any tax effect Taxed on any income withdrawn from the company and any shares given at less than market value
No op:ons on how to extract profit Mul:ple routes in which to extract profit in a tax efficient manner including, salary, dividends and 7ming of profit extrac7on
Other Financial Considera7ons
Helen Rowe Accountancy
Consider two illustra7ons showing the differences in tax due between a sole trader and a Company
I have assumed no other income or any other tax credits that an individual might receive.
Financial Illustra7ons
1st Illustra:on
Business Profits of £25,000
2nd Illustra:on
Business Profits of £50,000
Helen Rowe Accountancy
May be able to claim the Employment Allowance (introduced in 2014/15) which is a relief from paying any Employers NI on the first £2,000 of contribu7on Can have flexibility to set up Company schemes for any employees – for example Company pension schemes. Profits do not have to all be withdrawn as a dividend, you have the op7on to take a dividend when you want to so can have more effec:ve tax planning.
Limited Company Considera7ons
Helen Rowe Accountancy
You have flexibility to structure how you withdraw cash from your Company
• In the examples I have assumed salary equal to the current Personal Allowance which is most tax efficient in these illustra7ons (assuming no other income or other employees)
• The beneficial tax treatment of dividends is an area that may be looked at in the future but structuring your payments in this way is very common
• An accountant can advise you on how best to structure your payments
Dividend vs Salary
Helen Rowe Accountancy
Goodwill benefit reduced
• Prior to December 2014, a significant benefit of incorpora7on was that you could value goodwill in your business on incorpora7on and claim Entrepreneurs Relief on the CGT liability therefore reducing any tax due on this amount to 10%. The goodwill value could then be drawn out of the business as cash tax free.
• In addi7on, the goodwill could be amor7sed through your company accounts as a tax deduc7ble allowance.
• The Autumn Statement has now prevented this from happening going forward.
• You can s7ll value goodwill in your business but this will now be subject to a CGT liability.
Recent Changes
Helen Rowe Accountancy Capital Gains Tax
Poten7al gains on incorpora7on need to be considered
• Capital Gains Tax Liability may arise if you transfer certain assets (including goodwill) into the Company.
• The most likely assets that may give rise to a gain are freehold or leasehold premises and goodwill.
• Assets should be transferred at market value and a gain will incur if this is greater than cost.
• Moveable assets will only be subject to CGT if greater than £6,000 but they are unlikely to have a value greater than cost.
• You may be able to claim some tax reliefs to defer or reduce any gain if above the annual exemp7on (currently £11,100)
• You should talk to an accountant if you think this may be an issue for you
Helen Rowe Accountancy
As profits increase it is more tax efficient to trade as a Limited Company
Conclusion
• Each individual has different circumstances • There is no ‘magic’ profit number which means
now is the right 7me to Incorporate • An accountant can advise on when it may begin
to be beneficial for you.
• Weigh up the tax advantages versus the
increased fees and bureaucracy
When?
What Else?