DON'T LET THEM LEAVE HOME

Written by Jennifer Johnson


According to a new survey carried out by Alliance & where ID_NUM=9270; Leicester, one in five small business owners view tax as their greatest concern. The Chancellor has announced in his last budget that companies with profits below œ10,000 will not have to pay any corporation tax with effect from 1 April 2002. The question to be asked is: does that announcement make incorporation a more attractive option compared to being a sole trader?

The answer is that from a tax point of view, it is advantageous to trade through a limited company as long asrepparttar income is drawn fromrepparttar 134483 company byrepparttar 134484 owners as dividends from their shares andrepparttar 134485 amount of dividends drawn is restricted belowrepparttar 134486 40% band rate (i.e. œ31,063 for tax year 2002/03). That way,repparttar 134487 owners have no further personal tax ("income tax") to pay. Moreover, dividends are not subject to national insurance contributions. This is excellent news of course. But, if dividend income falls withinrepparttar 134488 higher rate bracket of income tax (i.e. above œ34,515), they will be taxed at 22.5% onrepparttar 134489 excess, which of course will increaserepparttar 134490 tax burden. The company profits are subject to corporation tax rates. Those are lower than income tax rates.

The most catastrophic scenario is whenrepparttar 134491 director takes his reward fromrepparttar 134492 company as salary. Then his/her salary is taxed at income tax rates (like a sole trader's income). That is because, unlike sole traders,repparttar 134493 tax system treats companies as separate from their owners because a company is a separate legal entity. The problem is thatrepparttar 134494 income taxes are higher than corporation tax rates. On top of that, they will be subject to employee and employer national insurance contributions, which of course increaserepparttar 134495 tax burden and render his position worse than even an unincorporated business ("sole trader"), because NIC Class 1 on payroll are higher than NIC Class 2 paid by self employed.

In contrast, a self employed person ("sole trader") is taxed at income tax rates onrepparttar 134496 profits from his business, which are added to his other sources of income. As it has already been mentioned, income tax rates are overall higher than corporation tax rates. On top of income tax, national insurance contributions class 4 are payable onrepparttar 134497 business profits within a specified band (7% on profits between œ4,615and œ30,420). National insurance contributions Class 2 are also paid by self-employed people, although those are lower than those payable by company directors on their salaries.

To illustraterepparttar 134498 above, let's take a simple example. We have a limited company and a sole trader. They both make œ60,000 profits each inrepparttar 134499 tax year 2002/03. We assume thatrepparttar 134500 company director takes a salary equal torepparttar 134501 amount of his personal allowances (untaxed income) of œ4,615 andrepparttar 134502 balance as dividends. The company will pay corporation tax at 19% equal to œ10,523 and nothing else. The sole trader will pay income tax œ16,542, National insurance Class 2 œ104 and National insurance Class 4 œ1,806. Total œ18,452. The bottom line is thatrepparttar 134503 person that has incorporated his business into a limited company will make a tax saving of œ7,929 compared to a sole trader! Isn't that fantastic?

Somebody might be wondering: why is this entire happening? The official explanation is that, this government, to helprepparttar 134504 economy grow, encourages people to leave as much profits within their businesses to be reinvested, instead of being taken out and spent.

The "unofficial line" is that, as a matter of fact, for yearsrepparttar 134505 Inland Revenue has tried to reclassifyrepparttar 134506 self-employed. The 1% in NIC hike on staff salaries aboverepparttar 134507 NIC threshold from next April adds to bothrepparttar 134508 employees' and employers' tax burden and may more than offsetrepparttar 134509 saving fromrepparttar 134510 corporation tax zero rate onrepparttar 134511 first œ10,000 of profits.

HOW TO AVOID WEB SITE GROWING PAINS

Written by Jennifer Johnson


According to a new survey carried out by Alliance & where ID_NUM=9270; Leicester, one in five small business owners view tax as their greatest concern. The Chancellor has announced in his last budget that companies with profits below œ10,000 will not have to pay any corporation tax with effect from 1 April 2002. The question to be asked is: does that announcement make incorporation a more attractive option compared to being a sole trader?

The answer is that from a tax point of view, it is advantageous to trade through a limited company as long asrepparttar income is drawn fromrepparttar 134482 company byrepparttar 134483 owners as dividends from their shares andrepparttar 134484 amount of dividends drawn is restricted belowrepparttar 134485 40% band rate (i.e. œ31,063 for tax year 2002/03). That way,repparttar 134486 owners have no further personal tax ("income tax") to pay. Moreover, dividends are not subject to national insurance contributions. This is excellent news of course. But, if dividend income falls withinrepparttar 134487 higher rate bracket of income tax (i.e. above œ34,515), they will be taxed at 22.5% onrepparttar 134488 excess, which of course will increaserepparttar 134489 tax burden. The company profits are subject to corporation tax rates. Those are lower than income tax rates.

The most catastrophic scenario is whenrepparttar 134490 director takes his reward fromrepparttar 134491 company as salary. Then his/her salary is taxed at income tax rates (like a sole trader's income). That is because, unlike sole traders,repparttar 134492 tax system treats companies as separate from their owners because a company is a separate legal entity. The problem is thatrepparttar 134493 income taxes are higher than corporation tax rates. On top of that, they will be subject to employee and employer national insurance contributions, which of course increaserepparttar 134494 tax burden and render his position worse than even an unincorporated business ("sole trader"), because NIC Class 1 on payroll are higher than NIC Class 2 paid by self employed.

In contrast, a self employed person ("sole trader") is taxed at income tax rates onrepparttar 134495 profits from his business, which are added to his other sources of income. As it has already been mentioned, income tax rates are overall higher than corporation tax rates. On top of income tax, national insurance contributions class 4 are payable onrepparttar 134496 business profits within a specified band (7% on profits between œ4,615and œ30,420). National insurance contributions Class 2 are also paid by self-employed people, although those are lower than those payable by company directors on their salaries.

To illustraterepparttar 134497 above, let's take a simple example. We have a limited company and a sole trader. They both make œ60,000 profits each inrepparttar 134498 tax year 2002/03. We assume thatrepparttar 134499 company director takes a salary equal torepparttar 134500 amount of his personal allowances (untaxed income) of œ4,615 andrepparttar 134501 balance as dividends. The company will pay corporation tax at 19% equal to œ10,523 and nothing else. The sole trader will pay income tax œ16,542, National insurance Class 2 œ104 and National insurance Class 4 œ1,806. Total œ18,452. The bottom line is thatrepparttar 134502 person that has incorporated his business into a limited company will make a tax saving of œ7,929 compared to a sole trader! Isn't that fantastic?

Somebody might be wondering: why is this entire happening? The official explanation is that, this government, to helprepparttar 134503 economy grow, encourages people to leave as much profits within their businesses to be reinvested, instead of being taken out and spent.

The "unofficial line" is that, as a matter of fact, for yearsrepparttar 134504 Inland Revenue has tried to reclassifyrepparttar 134505 self-employed. The 1% in NIC hike on staff salaries aboverepparttar 134506 NIC threshold from next April adds to bothrepparttar 134507 employees' and employers' tax burden and may more than offsetrepparttar 134508 saving fromrepparttar 134509 corporation tax zero rate onrepparttar 134510 first œ10,000 of profits.

Cont'd on page 2 ==>
 
ImproveHomeLife.com © 2005
Terms of Use