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  • Shepherd Partnership

Would I pay less tax if I incorporated my sole trader business?

Before notional tax credits for dividends were abolished back in 2016, working out whether it was more tax efficient to incorporate was relatively straightforward: When profits reached a certain level, moving to a limited company could often save tax by incorporation and using tax efficient profit extraction strategies.

Following the increase in dividend tax rates and the increase in the main rate of corporation tax from April 2022 and April 2023 respectively, and the reduction in the dividend allowance from April 2023, deciding whether to incorporate, or disincorporate, is not straight forward. As always, it all depends on the taxpayer’s individual circumstances and what the numbers show.

We have previously written an article on the advantages and drawbacks of incorporation which you can read on our news feed, so here we will just concentrate on examples of the tax position...

1. What would the tax position be if my taxable profits were £30,000 in 2023/24?

2. What if my taxable profits were, say, £60,000?

3. What if my profits doubled to £120,000?

This article assumes the following:

  • These examples refer to the 2023/24 tax year only.

  • These examples assume that the company is a single director company and therefore unable to claim the Employment Allowance. If the company would be entitled to claim this, a salary taken up to the personal allowance of £12,570 would produce a small saving compared to the above figures.

  • The above figures only consider a trader below the state pension age. Where the trader is over state pension age, no National Insurance would be due, meaning being a sole trader could be much more beneficial.

  • The additional costs of running a company, such as higher accountancy fees (due to greater reporting requirements) have not been factored in. There might also be the additional cost of running a PAYE scheme.

  • These examples assume that all company profits would be distributed as dividends. Additional savings can be made where profits are left in the company, rather than drawn as dividends. Dividends are taxable on the shareholder as these are declared, so the timing of personal income can be controlled. Sole traders are taxed on income as it is earned, regardless of whether they take this in drawings or not.

The above examples are merely for illustrative purposes only. Each business will differ, therefore, please get in touch to discuss your own circumstances with us so we can do the calculations for you.

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