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Business tax and incorporating a limited company

Business tax and incorporating a limited company

We are often asked about the pros and cons of incorporating a limited company. Individuals usually want to know about the tax efficiencies they could benefit from and whether they will be in a stronger financial position. The question is a difficult one to answer because it is impossible to give a clear and accurate picture without being able to predict the future.

The benefits will fluctuate depending on changes to tax legislation and any savings will vary depending on profit margins.

However, there are some factors which we do know and which could be used to inform decisions about whether to incorporate.

For this tax year (2017/18)

  • The personal allowance has increased to £11,500
  • The higher rate threshold has risen to £45,000
  • Corporation tax has been reduced to 19%

For this year the tax benefits for running a ltd company at profit levels above £20,000 show a tax saving increase when compared with last year.

From the 2018/19 tax year

  • Class 2 national insurance contributions will be abolished.

This means that for this tax year the self-employed will see a reduction in their tax bills. Limited company directors were expecting to pay more tax during this year as a result of the reduction in the dividend allowance to £2000. However, the reduction in the dividend allowance has now been dropped from the Finance Bill due to the impending general election. This is good news for company directors for now.  What will happen after the general election is anyone’s guess.


For the 2020/2021 tax year

  • the personal tax allowance will rise to £12,500
  • The higher rate threshold will increase to £50,000
  • The rate of corporation tax will be reduced by 2%

The reduction in corporation tax makes incorporating look like an appealing option. Of course, what we don’t know is what other changes may have come into force and what variables need to be considered.

Overall incorporating a limited company generally offer tax efficiencies, particularly for those generating annual profits in the region of £50,000 and this appears to be the case for the next three years. As always everyone’s circumstances are different and it is always advisable to discuss your specific circumstances with an accountant before making decisions on the structure of your business.

There are of course other factors to consider when contemplating setting up a limited company. If you are currently considering incorporating a limited company then this short video offers some useful information.

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