Whether stemming from self-employed individuals or partnerships, we’re seeing an increased appetite from business owners to move their operations to a corporate model.
What are the benefits?

Whilst tax should never be the main driver of any transaction or restructuring, under the right circumstances there are potential taxable benefits to business owners who might wish to incorporate.

Corporation tax is currently at 19%, whereas sole traders and partners pay income tax on their profit, or profit share in the case of partners, at up to 45%. Despite the corporation tax rate set to jump to 25% in April 2023, there is still potentially a significant benefit from an income tax perspective in running the company model.

Furthermore, partners and self-employed individuals are subject to income tax on their entire profit share, regardless of whether they draw all of the profits from the business. Most enterprises will typically require the owners to leave substantial cash balances within the business as working capital, however not all profit is cash. In this situation, the individual is hit with a high rate of income tax on profits which never actually reach their own pocket, and so the effective tax rate they pay can be much higher than 40% or 45%.

In contrast, after corporation tax, shareholders under a company model only pay tax on drawings taken, usually in the form of dividends. Shareholders therefore have the opportunity to decide the amount of dividends declared and only need to declare sufficient dividends to fund their lifestyles – allowing them to manage their tax bills accordingly.

Find out more

Under the correct circumstances, significant tax savings and a greater control of tax liabilities can be achieved when incorporating a business. To find out more, get in touch on 01788 539000 or 0116 261 0061 or email us at [email protected].

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