Are companies limited by shares tax efficient?

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Hi

I’m launching a new clothes company. The only problem is, I know absolutely nothing about forming a company. I’ve been told that I want my company to be limited by shares, and that seems to be the most popular company type. What worries me is taxes. As a sole trader, I’ve not got a lot to worry about - which is nice. What are the taxes like for limited companies? Is this a relatively efficient structure, or how does it all work?

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The accounting and taxation requirements of limited companies are more complex than they are for sole traders, but the tax advantages of running a business as a company often outweigh this perceived burden.

  • Limited companies pay 20% Corporation Tax on all taxable income - sole trader profits are liable for up to 45% Income Tax, as well as National Insurance Contributions.

  • If you are a director and shareholder of a limited company, you can pay yourself tax efficiently by taking a director’s salary up to the National Insurance Contributions (NIC) lower profits limit (currently £8,060 for 2015-16). You can take the rest of your income as shareholder dividends.

  • Salaries are treated as a tax-free expense, so your company will not pay Corporation Tax on your director’s salary, nor will you pay any Income Tax or NIC on your director’s salary if you you do not exceed the NIC lower profits limit.

  • You can pay yourself dividends as often as you like, as long as the company has available profits to pay out. Dividend payments are not tax-deductible because they are paid out of profits after the deduction of 20% Corporation Tax. However, shareholders do not pay any personal tax or NIC on dividend payments until their total annual income exceeds the basic rate limit of Income Tax (currently £31,785 for 2015-16).

You can also leave money in your company to be removed in a later tax year - this is beneficial if removing all of your profits in one tax year would result in a higher personal tax liability.

a year ago
 

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