If you’re a sole trader, it’s around this time of year that you should be thinking about your business status, and whether you’ve reached the point where it’s time to incorporate. With many sole traders having a year-end of 31st March, understanding your position now gives you time to consider your options, and get ready to begin trading as a limited company from 6th April, if that’s the right thing for you to do.
Until now, making the decision was fairly straightforward. If your business was making an annual profit of around £18k or more, it would certainly be worth considering the option to incorporate. By doing so, and taking income in the form of dividends, a business owner paying basic rate tax could expect to make a saving of 9% per year.
From April though, things are getting a little more complicated. HMRC is introducing changes, increasing tax on dividend income in an effort to dissuade people from setting up limited companies simply to reduce their tax bill – and also to help the government achieve its plans to reduce the rate of Corporation Tax to 18% by 2020.
From April 2016, dividends will be taxed as follows:
- 0% on dividends up to £5k.
- 7.5% on all dividends over 5k allowance for basic rate tax payers.
- 32.5% on all dividends over 5k allowance for basic higher tax payers.
The effect of these tax increases is likely to make incorporation look unattractive to some business owners who may have been considering making the transition – while those who have already taken the step to incorporation will see their dividends eroded, causing some to rethink their limited status. Although reverting may mean paying a little more in tax, overall costs could well reduce – particularly if the business has just one owner.
Having said this (we did warn you it’s all a bit complicated), depending on the individual business owners personal circumstances, incorporation could still be beneficial. It might be for example that by utilising their spouse or civil partner, some of the benefit can continue to be attained, but operating as a limited company is certainly not going to be as attractive as it has been in the past.
So what’s the best option for you?
First of all, don’t panic. With just over 2 months left to go there’s still time to review your position and ensure your business starts the new financial year tax efficient. As we said earlier, what’s right for you will come down to your own unique circumstances – personal and financial – along with a range of other factors. Sole traders thinking of incorporating will need to consider the additional costs and responsibilities associated with operating a limited company, while limited companies thinking of becoming unincorporated will have to consider the impact of not being able to offset certain kinds of expenditure (such as subsistence costs), and whether a change of status would alter the way their business is perceived by customers.
Understand Your Options Now
Let Inca Review Your Position
With these changes coming very soon, it’s vital that your business is structured to be as tax efficient as it can be, so you get to keep as much of your hard earned profits as possible. Inca can review your position in detail, advise you on the implications of these changes for you and your family, and guide you towards the best decision.
Call us now to book your review
from as little as £140 + VAT.
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You can find videos from Inca about how to incorporate a business – along with lots more useful information on our YouTube channel.
Book a place on a workshop
If you’re interested in booking a place on a workshop, or if you’d like more specific help and advice on preparing a budget for your business, give us a call and we will be very pleased to give you any assistance we can! Phone: 01235 868888 or Email: [email protected].
