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Author: Shannan Hearne-Fortner
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
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
as the income is drawn from the company by the owners as
dividends from their shares and the amount of dividends
drawn is restricted below the 40% band rate (i.e. œ31,063
for tax year 2002/03). That way, the 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
within the higher rate bracket of income tax (i.e. above
œ34,515), they will be taxed at 22.5% on the excess, which
of course will increase the tax burden. The company profits
are subject to corporation tax rates. Those are lower than
income tax rates.
The most catastrophic scenario is when the director takes
his reward from the 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, the tax system treats
companies as separate from their owners because a company is
a separate legal entity. The problem is that the income
taxes are higher than ( Next Page )
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