Trade secrets

By THIS IS MONEY
Updated:

 

IF I use my personal allowance plus the 10% rate of tax on other income and am credited with the 10% tax on dividends, it appears that I would be better off trading as a company as opposed to as a sole trader.

Maurice Fitzpatrick at accountants Numerica replies: In the example you give of either flowing £20,000 of income through a company or flowing £20,000 of income through your sole trader accounts, there does appear to be an effective tax saving of £2,200 by using the company rate. This is based on the following calculation:

(a) Tax payable if the £20,000 income is flowed through a company and paid out by way of dividend: £20,000 x 19% = £3,800. Under the new company tax surcharge rules, profits made by a company and paid out by way of dividend have to bear tax at 19%.

(b) Flowing £20,000 through your sole trader accounts. Assuming that your personal tax allowance, your lower rate tax band of 10% and your NIC exempt amount of £4,745 have already been used, then the tax and NIC payable on this £20,000 of income will indeed be £6,000 as you say.

(£6,000 - £3,800 = £2,200 saving).

Both the above calculations assume that the respective income received by you in either case is not liable to UK higher rate income tax.

Purely in terms of the above figures, a company still appears advantageous. However, this is a complex area and you should seek further advice before making a final decision.

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