Helen Rowe presentation to Bristol SPG May 2015
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This document compares the tax and reporting implications of operating as a sole trader versus a limited company. Key differences include: - Sole traders pay income tax on business profits while companies pay corporation tax and shareholders/directors pay income tax on salaries/dividends - Limited companies have greater flexibility in how profits are distributed and extracted for tax purposes - Limited companies must file annual accounts and returns publicly while sole traders have less stringent reporting requirements - The document provides two examples showing lower overall tax liability when operating as a limited company for annual profits of £25,000 and £50,000 respectively.
Helen Rowe presentation to Bristol SPG May 2015
- 1. Helen Rowe Accountancy Sole Trader or Limited Company? Helen Rowe 20th May 2015
- 2. 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
- 3. 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 Can withdraw cash without any tax effect Taxed on any income withdrawn from the company and any shares given at less than market value No op:ons on how to extract profit Mul:ple routes in which to extract profit in a tax efficient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
- 4. 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
- 5. Helen Rowe Accountancy 1. Annual Profits at £25,000 £1,091 Benefit
- 6. Helen Rowe Accountancy 2. Annual Profits at £50,000 £3,671 Benefit
- 7. 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
- 8. 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
- 9. 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
- 10. 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
- 11. 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?
- 12. Helen Rowe Accountancy For more informa7on please contact: Helen Rowe Accountancy [email protected]