One of the more common questions accountants get asked these days is “should I be limited?”
Unfortunately, this is not a “one size fits all” situation and careful consideration needs to be made.
Before the dividend allowance was introduced the most common reason for a company was its tax efficiency. It would allow someone with profits of up to £40,000 to be taxed at the company rate, saving the cost of National Insurance, whilst extracting the money tax free. Giving a tax saving of up to £3,500.
Several reasons need to be considered before a company can be confirmed as the correct way forward:
- Tax efficiency
Security Of A Limited Company
Having a limited company gives people the security that if things go wrong there will not necessarily be the consequences of losing your house.
If you have knowingly done something wrong then that is a different case, but if the downturn is not of your doing then you do not need to stay awake at night wondering if your house will be taken away. The maximum that would be lost is the cost of the shares and any money that has been put into the company.
Tax Efficiency Of A Limited Company
Whilst not as efficient as previously, a limited company can still be a tax-efficient vehicle. With the corporation tax rate at 19% and dropping to 17% over the next few years depending on the election outcome, this is still more efficient when compared with an income tax rate of 20% plus National Insurance at 9%.
However, careful thought needs to be made when considering what to do with any profits. If you have a lifestyle where you would need to extract all of this then you may find it not to be as good as it first seems. This is because any dividends over £2,000 would first be taxed at 7.5%, before increasing to 32.5% once you exceed the basic rate band. This then brings the tax saved element down to a level where it may not outweigh the costs and restrictions of a limited company.
Also, with the introduction of Section 24 for financed properties, the restriction of income tax relief on mortgage charges and interest, a limited company has been an attractive option for property businesses. There are several steps to take to avoid an additional charge to Stamp Duty and Capital Gains Tax, which may not be possible for everyone, but with highly geared portfolios the tax saving can be considerable.
Limited Company Structure
Careful consideration should be made into the purpose of the company. The outset is the prime time to put a structure together to benefit the whole family. For example, if set up correctly shares could be allocated to husbands/wives/partners and children. This would enable dividends to be paid to utilise the tax-free amounts, as well as extracting money to cover costs such as school/university fees, without creating a tax bill on the parents. It can also be viewed as an inheritance tax planning exercise.
However, it is important to bear in mind that everyone’s situation is different. So, if this is something you may want to consider, why not have an initial free meeting with us to find out.
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