This is a perennial question I am constantly asked, and the answer is….
A Limited Company is usually more tax efficient.
Every individual or partnership’s circumstances are different, so there can be no hard and fast rules, but as a general guide, a company will be more tax efficient.
You can save considerable national insurance by remuneration planning, can save higher rates of tax by paying yourself less than the full profits, and can defer tax by paying yourself at different times.
‘Around 246,000 partnerships and as many as a million sole traders could be wasting up to £4.2bn a year in national insurance contributions because they have not incorporated their businesses.
Owners of unincorporated firms are classed as being self-employed and when their earnings reach a certain level; they are obliged to pay national insurance as a percentage of annual taxable profits’
A two person partnership earning as little as £30,000 (i.e. £15,000 each partner) can save almost £1,200 in tax and NIC with careful remuneration planning, and on earnings of £80,000 (i.e. £40,000 per partner) the savings can be as much as £4,000.
Adding the other commercial benefits of incorporation such as protection and separation of personal assets in the event of business failure, finance being more easily available, more credibility is given to the business by outsiders, and forming a company is usually a sure-fire winner.
It’s not all win, win, win with a company though; some capital taxes can be more expensive, running a car through a company can be less tax efficient, and accountancy fees (dare I say) can sometimes be higher. But by discussing these with your accountant, there will generally be a way to budget.
Also, do not go off rushing into forming a company from day one of your business, if you feel a loss could be made in the opening years then higher and earlier tax loss relief can generally be claimed if operating as a partnership or sole trader.
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