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How to set up the tax structure for a limited company - UK tax advice for Business Owners

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Uploaded on Aug 12, 2011

http://www.incauk.biz/
Hi, I'm Graham from Inca Chartered Accountants

We put together this video series titled "Tax tips for small businesses" to help you understand and save tax. One of the questions we get asked most frequently is which structure is best for my business. Explaining in the first video the benefits for a sole trader. In this one I'm going to talk more about the limited company and its benefits. Now when we start talking about limited companies many people think about grand PLCs and boardrooms and annual general meetings and perhaps getting a share of the profits once or twice a year in the form of a dividend. Most limited companies don't operate like that. They are small in structure, they are small in ownership and there as a vehicle to provide protection and income benefit to people who own them. In tax terms as soon as you start making profits above £7500 a year you are actually better off as a limited company than as a sole trader. That's because the sole trader is paying tax at a rate of 29% - 20% tax plus an additional 9% in what's known as Class 4 National Insurance, which is just tax -- you don't get a bigger hospital, you don't get to the front of the queue, you don't get a bigger pension -- its just tax.

A company pays tax at 20% that's a 9% saving. Have a chat with your bank manager and see if you will get 9% return on investment from that, then give me a call because I'll put some money in as well. So 9% tax saving is quite significant but a company requires more administration. Its more costly to operate so there has to be enough benefit for the company owner to make it worth while. We say if you are making more than £15,000 a year in profit. So that's your sales and then all your expenses taken off, then you should take a look at it.

At that level there is enough benefit to outweigh some of the disadvantages of the structure and cost. As an owner you get a share of the profits. That comes in what's known as a dividend. Now you can have those dividends as frequently as you want. Some people think you can only have them once or twice a year. You can have 365 dividends in a year if you really wanted to and if your business allowed it, and of course if you put the necessary paperwork together. The other big advantage of the limited company is protection. I don't want to lose my house if the business goes wrong and I'm sure neither do you. Limited company's, if you run correctly gives protection against your personal possessions becoming part of any carve up situation that might happen. So that's the limited company. If you are making profits it's a good idea. If you are not, have a think about the Sole Trader. In the next video I'm going to talk about VAT.

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