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Is the Small Company Still Viable?
Newsletter issue - April 07.
The increase in corporation tax for small companies from 19% to 22% over three years is intended to discourage businesses from incorporating just to save tax. As from 2009 the corporation tax rate will be higher than the basic rate of income tax, which will apply on profits of up to about £43,000.
For 2006/07 the basic personal tax rate was 22% and the corporation tax rate 19% but by 2009/10 it looks like being the other way around with a basic personal tax rate of 20% and a corporation tax rate of 22%, an overall swing of 5% more tax for small companies!
However, an individual also has to pay Class 4 NICs at a further 8% on his self-employed profits, on top of the income tax due.
To assess the overall effect of these different tax charges, consider a business making profits of £50,000 in 2009. As a company it will pay corporation tax of £11,000. Trading as an individual the total income tax and NI payable will amount to £12,614, (assuming allowances increase in line with inflation). The tax saving for the company is thus expected to be about £1,600 per year. However the funds are held within the company, so transferring the money to the shareholder may create a further tax charge if that shareholder is already paying higher rate tax. Whether or not you plan to retain profits in the company for reinvestment will be a major factor to consider.
If you are considering forming a company, or want to stop using one, please come and talk to us first so we can work through the numbers. There will be a different answer for each business and at present in the 2007/08 tax year it is likely the company is still the best option.
What our clients say about us...
"Paul has provided accountancy services to my company for 2 years now. I can recommend Paul very highly; his skills as an accountant are highly detailed and professional and he is always available to provide advice. One aspect of the way Paul works that I greatly appreciate is a preference to meet face to face when there is a detailed conversation to be had. I personally find this more productive and is a benefit of working with a small accountancy firm that you wouldn't get with the large faceless providers."
ALISTAIR FAIRWEATHER - PROGRAMME & PROJECT MANAGER, DELIVERING/RESCUING I.T. 7 BUSINESS CHANGE WITH BUDGETS UPTO £50M INC SUPPIER MANAGEMENT
"I couldn't ask for more from Paul as an Accountant. Paul has been accountant to Work Relief Charity Recruitment for just over a year now and is proving an invaluable asset. Accurate, knowledgeable, flexible with an emphasis on service delivery, I would recommend Paul's services to any organisation looking for an accounts professional."
Neil Price - Managing Director at Work Relief Charity Recruitment
"Paul was a referral from a family member when I started my business 2 years ago. As this was the first time I had ever run my own company I was totally clueless over the financial side of matters and was worried that I may have made mistakes in any of my accounting. I needn't have worried as after enaging Paul for a set monthly fee he was always there on the end of the phone for all sorts of questions I had and no matter how trivial they were Paul gave me all the information I required and more and did an excellent and painless job at the end of my first year! Couldn't ask for any better to be honest. Just two words - hire him!!!"
Lee Westrap MBCS - Director - Bulldog IT Services
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