This question has come up several times recently. To help clear up confusion on this difficult question, and to allow simple figures to be played around with, I have included a basic calculator on the website for you to have a play with.
You will find this in the Tax Resource Centre under tax calculators and click on incorporation calculator. This is a basic version of a very clever piece of software I have in the office [private_basic]but it gives a clear idea of possible tax savings by moving your trade from a sole trader or partnership into a Limited Company. However, simple as it is, you need to factor in vehicles. As a sole trader or partner you get tax relief on your car less a private use adjustment but there is no tax on you personally. If you have a car through your Limited Company, there are likely to be assessable benefits in kind based on a combination of original manufacturers price and the CO2 output of the car.
For example, my Vauxhall Zafira has an original cost of £22,700 and with the CO2 output and the fact it is a diesel, the benefit is 30% of the original cost each year which is £6,810. This means a cost to me of £1,362 at 20% tax. The benefit is higher if the company supplies fuel for private use. The company also pays class 1A national insurance on the car as well.
You also need to remember that a company director is still subject to the minimum wage of £6.08/hour currently. Some accountants say you do not need to worry about that and suggest a much lower wage that does not even reach the lower limit for national insurance. This is a dangerous practice though and as HMRC are intending to go through an extra 50,000 business’s records in the next 12 months, minimum wage issues are known to be a part of this assessment. This low income practice also means you start to have gaps in your national insurance contributions which can seriously affect your state pension rights when you get to retirement.
So, you can see the simple question “do I incorporate my business?” has far from a simple answer. The main rule of thumb is when you hit higher rate tax as a partner or sole trader, you should look regularly to see if forming a company may be benficial to you.
I am happy to run your figures through my software anytime if you are interested. Please just email/text/ring me and I will go through the figures with you.