Incorporating a Limited Company

The benefits of Incorporation

If you’re currently a sole trader and your annual profits are high, it might be time to think about incorporating your company. Incorporating your sole trade into a limited company comes with many benefits as well as being an efficient way to save you money on tax each year.
As you’ll know, as a sole trader when it comes to your tax return, profits over £50,270 come with a 40% income tax charge in addition to national insurance. Whereas, in a Limited company, corporation tax is charged at 19% of your profits after payroll.

You will only pay income tax when you withdraw the money from the company, and this is at a much lower rate.

The most tax-efficient way of withdrawing this money out of the company is paying yourself a minimal salary (enough to pay national insurance but under the income tax personal allowance threshold).
You will then withdraw the remainder as dividends and these are taxed depending on whether you are a basic rate, higher rate, or additional rate taxpayer with the rates being 7.5%, 32.5%, and 38.1% respectively.
For example, as a sole trader, your income is £60,000 a year, at the end of the tax year, you file your tax return and are hit with a tax bill made up of £11,432 income tax and £4,019 national insurance, your take-home pay is £44,588.
However, if you incorporate your company, and pay yourself £9,600, your profits after payroll are £50,400, on which you pay 19% corporation tax (£9,567). This means you have a net company profit of £40,833 which you could draw as dividends. If you do withdraw all these profits as dividends, you will only be paying £2,730 tax from the dividend income and £4 national insurance, as well as £104 employer national insurance. This means your total tax liability for the year becomes £12,465 – a tax saving of almost £3,000.
If you decide not to draw funds from the company and reinvest profits, your maximum tax liability will be 19%.

The benefits aren’t, however, limited to tax savings

As a shareholder of a limited liability company your business becomes a separate legal entity to yourself, this means, unlike in sole trade or working as a partnership, your personal assets are not at risk and your liability is limited to your share capital.

Ready to take the next step with your business? We provide limited company set-up and support services. Book a free discovery call with us today.

Samantha Cast
Elvis Presley

I have no use for bodyguards, but I have very specific use for two highly trained certified public accountants.

Elvis Presley