MAKE A GREAT FIRST IMPRESSION!

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 117546 company byrepparttar 117547 owners as dividends from their shares andrepparttar 117548 amount of dividends drawn is restricted belowrepparttar 117549 40% band rate (i.e. œ31,063 for tax year 2002/03). That way,repparttar 117550 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 117551 higher rate bracket of income tax (i.e. above œ34,515), they will be taxed at 22.5% onrepparttar 117552 excess, which of course will increaserepparttar 117553 tax burden. The company profits are subject to corporation tax rates. Those are lower than income tax rates.

The most catastrophic scenario is whenrepparttar 117554 director takes his reward fromrepparttar 117555 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 117556 tax system treats companies as separate from their owners because a company is a separate legal entity. The problem is thatrepparttar 117557 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 117558 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 117559 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 117560 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 117561 above, let's take a simple example. We have a limited company and a sole trader. They both make œ60,000 profits each inrepparttar 117562 tax year 2002/03. We assume thatrepparttar 117563 company director takes a salary equal torepparttar 117564 amount of his personal allowances (untaxed income) of œ4,615 andrepparttar 117565 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 117566 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 117567 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 117568 Inland Revenue has tried to reclassifyrepparttar 117569 self-employed. The 1% in NIC hike on staff salaries aboverepparttar 117570 NIC threshold from next April adds to bothrepparttar 117571 employees' and employers' tax burden and may more than offsetrepparttar 117572 saving fromrepparttar 117573 corporation tax zero rate onrepparttar 117574 first œ10,000 of profits.

Home Office Stress Busters

Written by BB Lee


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 117545 company byrepparttar 117546 owners as dividends from their shares andrepparttar 117547 amount of dividends drawn is restricted belowrepparttar 117548 40% band rate (i.e. œ31,063 for tax year 2002/03). That way,repparttar 117549 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 117550 higher rate bracket of income tax (i.e. above œ34,515), they will be taxed at 22.5% onrepparttar 117551 excess, which of course will increaserepparttar 117552 tax burden. The company profits are subject to corporation tax rates. Those are lower than income tax rates.

The most catastrophic scenario is whenrepparttar 117553 director takes his reward fromrepparttar 117554 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 117555 tax system treats companies as separate from their owners because a company is a separate legal entity. The problem is thatrepparttar 117556 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 117557 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 117558 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 117559 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 117560 above, let's take a simple example. We have a limited company and a sole trader. They both make œ60,000 profits each inrepparttar 117561 tax year 2002/03. We assume thatrepparttar 117562 company director takes a salary equal torepparttar 117563 amount of his personal allowances (untaxed income) of œ4,615 andrepparttar 117564 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 117565 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 117566 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 117567 Inland Revenue has tried to reclassifyrepparttar 117568 self-employed. The 1% in NIC hike on staff salaries aboverepparttar 117569 NIC threshold from next April adds to bothrepparttar 117570 employees' and employers' tax burden and may more than offsetrepparttar 117571 saving fromrepparttar 117572 corporation tax zero rate onrepparttar 117573 first œ10,000 of profits.

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