You can still save tax by operating your business through a company rather than as a sole trader or partnership, but the level of tax savings will depend on the range of salary, dividends and benefits that you want to take out of the company.
If you take a salary equal to the personal allowance of £6,475, and extract the rest of the profits as dividends, you could make the following tax savings in the current tax year. This salary level involves paying some NICs as the NIC threshold is £5,715, but a lower salary would waste part of the dividend tax credit. Salary is also tax deductible for the company whereas dividends are not.
For 2009/10 the following shows for different profit levels the tax payable as a sole trader, by incorporating as a company and the total saving...
Profits £15,000: Sole trader: £2,573 - Company £1,951 - Total saving: £622
Profits £30,000: Sole trader: £6,773 - Company £5,101 - Total saving: £1,672
Profits £50,000: Sole trader: £13,169 - Company £9,463 - Total saving: £3,706
Profits £100,000: Sole trader: £33,669 - Company £29,838 - Total saving: £3,831
Profits £150,000: Sole trader: £54,169 - Company £50,213 - Total saving: £3,956
There are other tax factors to consider. For example...
Tax rates are due to increase from 2010/11. Individuals will pay a top rate of 50% on income over £150,000 and the personal allowance will be withdrawn for those with income over £100,000. The tax rate paid by a small company will also rise to 22%. These changes will reduce the tax savings to be made by operating through a company. The calculations summarised as follows for 2010/11 assume a salary equal to a personal allowance of £6,635, which is reduced to nil when profits exceed £113,000.
Profits £15,000: Sole trader: £2,530 - Company £2,004 - Total saving: £526
Profits £30,000: Sole trader: £6,730 - Company £5,304 - Total saving: £1,426
Profits £50,000: Sole trader: £12,998 - Company £9,704 - Total saving: £3,284
Profits £100,000: Sole trader: £33,448 - Company £30,273 - Total saving: £3,215
Profits £150,000: Sole trader: £56,642 - Company £53,633 - Total saving: £3,009
Please talk to us about the savings possible for you. We can provide a calculation specific to your circumstances and outline the many other factors you will need to consider when incorporating.
Low property prices are tempting some people to buy residential properties to develop and sell when the market improves. If you intend to do this, the Tax Inspector may argue that you are actively trading in properties, rather than just investing and letting.
If you are considered to be trading in properties it will have the following tax consequences:
Please talk to us about your plans so we can advise you on the tax strategies which will fit your business.
There are a number of reasons why you would want to, or need to, register for VAT quite quickly. Once your turnover for the last 12 months exceeds £68,000 you must register for VAT within 30 days. If you start a new business, incorporate your current business (see above) or buy an existing business you may also need to register for VAT immediately.
The VAT office aims to issue a VAT number to 70% of businesses within 13 working days of receiving the application for VAT registration. However, the remaining 30% of businesses may suffer delays, which can damage the viability of the business. If you need to register for VAT follow these tips to speed up the process:
If you drive a company car you need to keep an eye on the tax you pay for using the vehicle, as this is likely to increase year on year.
The tax charge is related to the car's CO2 emissions and its price. An average car has CO2 emissions of around 160g/km, which means for a petrol car the driver is taxed on 20% of the vehicle's list price every year. This percentage will increase to 21% from 6 April 2010, and will be 22% from 6 April 2011.
The list price is the show-room price for the car, not what your employer actually paid including discounts. Currently the list price used for the tax calculation is capped at £80,000, but from 6 April 2011 this cap is removed. This will hit drivers who get their own companies to pay for top range cars.
Say you drive an Aston Martin DB6 costing around £160,000, which has CO2 emissions off the scale. In 2009/10 you are taxed on £28,000 (35% x £80,000). At the 40% tax rate this amounts to a tax bill of £11,200. From April 2011 you will be taxed on £56,000 (35% x £160,000). At the top tax rate of 50% that will apply in 2011/12, this will result in a tax bill of £28,000.
If you are drive an alternative fuel car, such as a hybrid, bio-fuel, or E85 fuel, you currently get a reduction in the tax charge compared to normal cars. This discount will be removed from 6 April 2011 for all alternative fuel cars, except for pure electric cars, which will still be taxed on 9% of their list price.
So the message is: get that expensive car out of your company ASAP, and if you must drive a company car, may be it's time to start thinking electric, or at least very low CO2 emissions.
Q. My company submitted a claim for a tax refund for £15,000 in January, but it still hasn't materialised. We really need that cash now. I've chased the Tax Office but get some excuse about security checks. How long will I have to wait for this money?
A. HMRC have imposed extra security checks on many tax refunds in an attempt to block fraudulent claims that have been flooding the system. These extra checks are slowing up refunds to genuine businesses. A six month delay is quite exceptional. Try writing to your Tax Office suggesting you will take the matter to your local MP if you do not receive the tax refund within 10 days.
Q. In the last two years I have lent my company in excess of £40,000, but now the company is insolvent and I will not receive any of that money back. Can I claim any tax relief for that loss?
A. Assuming your company was a trading company, as opposed to a company that just holds investments, you can claim a capital loss for your loan. The Tax Inspector may ask you to show the cash was used for the company's trade, rather than simply use to pay dividends, so be prepared to supply the company's accounts if requested.
Q. I was made redundant on 27 February 2009 from a job that paid £16,000 a year. Almost immediately I found a part time job that pays about £9,400 a year. I made a claim for Tax Credits as I am working 30 hours a week now, but I've received a Nil award. What should I do?
A. Your initial Tax Credits award is based on your income for 2008/09, which was too high for you to qualify for Tax Credits, assuming you are a single person with no children. However, on your current wage you should qualify for about £1,200 a year in Tax Credits. Just ring the Tax Credits Office and tell them your current wage rate. They should revise your tax credits award within weeks.
5
Deadline for PAYE settlement agreement for 2008/09.
6
Deadline for 2008/09 forms P11Db, P11D and P9D to be submitted and copies of P11D and P9D to be issued to relevant employees.
Deadline for employers to report share incentives for 2008/09 - form 42.
14
Return and Payment of CT61 tax due for quarter to 30 June 2009.
19/22
PAYE/NIC and CIS deductions due for month to 5/7/2009 or quarter 1 of 2009/10 for small employers.
19
Class 1A NIC due in respect of the tax year 2008/09.
31
Second self assessment payment on account due for 2008/09.
Second 5% penalty surcharge on any 2007/08 outstanding tax due on 31 January 2009 still unpaid.
Second £100 penalty if 2007/08 tax return due for filing on 31 January 2009 is still outstanding.
Deadline for Tax Credits to finalise claims for 2008/09 and renew claims for 2009/10.