Factsheets

The issue of whether to run your business as a company or a sole trade or partnership is an important decision. The cumulative effect of changes to the tax system over a number of years up to 2004 resulted in significant tax savings if a business was incorporated.

Changes in recent years have reduced these savings and the government has moved to discourage small businesses from incorporating by announcing increases to the tax rates for small companies over the next two years. In this factsheet, we summarise the relevant tax changes and show the potential tax savings currently available from operating as a company.

This factsheet calculates the position for 2007/08 using the current rates of tax and NI. The government has announced proposals to reduce the basic rate of tax on earnings and profits to 20% and to increase the band of earnings on which the full rates of NI are payable (11% for employees and 8% for the self employed). These changes will be phased in as the corporation tax rates for smaller companies are increased.  In addition we consider other relevant factors including potential disadvantages.

The examples below give an indication of the 2007/08 tax savings that may be achievable for husband and wife who are currently in partnership.

 

Profits:	£30,000	£50,000	£100,000
Tax and NI payable:	£	£	£
As partners	5,558	11,560	28,098
As company	3,910	7,910	20,250
Potential saving	1,648	3,650	7,848

              

Rate of corporation tax for small companies
Profits up to £300,000 are taxed at 20% from 1 April 2007. This rate is set to rise by 1% a year for the next 2 years.

National Insurance
The rate of employees' ...