The number of private sector businesses that are now incorporated is on the rise. So why do people choose to incorporate? There are certain benefits relating to legalities and limitation of liability, but what are the tax and financial benefits to this? We asked Jo Brown of Nicholsons Accountants (pictured).
“There is often a misconception that when you are the shareholder and director of a company that all the profits belong to you. You should beware not to fall into this trap. Once incorporated, the profits belong to the company and tax planning becomes an essential tool to extract this profit for yourself in the most tax efficient manner.
"The rules are ever changing so the old style, low salary and high dividends approach is not as “cheap” as it used to be for sole director/shareholder companies. With tax rates for companies reducing to 17% over the next 3 years (currently at 19%), incorporation becomes ever more attractive for those who can plan to take their profits out over time.
"So how do the numbers work (based on the current year tax rates):
"The table can only act as a guide for the lower tax rates in the company when compared against the individual tax rates (Including NIC). The remainder of the profits within the company then need to be output to the Director/Shareholder by way of salary and dividends, which come with their own taxations rates.
"The main point to remember is that good tax planning with your accountant is vital before embarking on a journey into the world of incorporation as it may not be all it seems when you want to spend the profits!”