The answer is that from a tax point of view, it is advantageous to trade through a limited company as long as income is drawn from company by owners as dividends from their shares and amount of dividends drawn is restricted below 40% band rate (i.e. œ31,063 for tax year 2002/03). That way, 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 within higher rate bracket of income tax (i.e. above œ34,515), they will be taxed at 22.5% on excess, which of course will increase tax burden. The company profits are subject to corporation tax rates. Those are lower than income tax rates.

The most catastrophic scenario is when director takes his reward from 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, tax system treats companies as separate from their owners because a company is a separate legal entity. The problem is that 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 increase 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 on 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 on 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 illustrate above, let's take a simple example. We have a limited company and a sole trader. They both make œ60,000 profits each in tax year 2002/03. We assume that company director takes a salary equal to amount of his personal allowances (untaxed income) of œ4,615 and 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 that 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 help economy grow, encourages people to leave as much profits within their businesses to be reinvested, instead of being taken out and spent.

YOUR HOLIDAY LETTER ~~~~~~~~~~~~~~~~~~~

Sending a yearly "wrap-up" letter to your family, friends and relatives is a great way to save time and money. Instead of buying expensive Hallmark cards and writing individual letters to everyone on your list, why not design your own holiday letter? When writing a "wrap-up" letter, remember this is perfect time to inform friends and relatives what's been happening in your family's life over past year. Even if something important happened in your life back in February or March, some of your acquaintances might not have heard about it, so let them know. After writing a rough draft, use your computer (or a friends) to help produce an attractive letter. You'll find programs such as Microsoft Word or Publisher with wonderful "wizards" that will walk you step by step through process so you will have a beautifully designed letter in about an hour or two. SIMPLE GIFT IDEAS ~~~~~~~~~~~~~~~ Sit down and take time to think about what each person on your list would like to receive. Of course everyone would love to get tickets for a seven day Caribbean cruise, but very few of us can afford to spend that kind of money on a present. Here are a few ideas to get you thinking of all possible gifts that can be easily put together without need to spend much money. Know of anyone entering college? Put together a "care package". Fill it with all basic necessities a college student might need (or want). Cookies, snacks, toiletries, wool socks, a new college student "manual", etc... Anything you think a young 18-21 year old student could use while away at school. Do one of your relatives work in an office? Put together an "office pack". The key is in presentation. Find a suitable container and pack it with office supplies, personalized pens or coffee mugs, magazines, far side calendar, crossword puzzle book, etc. CREATE A BASKET ~~~~~~~~~~~~~~~