SAVING TAX

Since April 2002 the owners of small businesses have been able to make significant reductions to their tax bills by operating their business as a limited company. We have encouraged most of our clients, over the last two years or so, to take advantage of these savings. Many clients are now literally thousands of pounds better off from following our advice. Whilst the advantages have, from April 2004, been reduced, it is still possible to save a lot of money. The following table shows the yearly tax and national insurance currently payable by a sole trader for different levels of profit compared to that payable if the business operated, as tax-efficiently as possible, as a limited company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               Annual Net Profit (£)                              Tax and NI as a sole trader (£)                                   Tax and NI as a limited company (£)                                   6,000                                   278                                   119                 8,000                   838                                   539                 10,000                   1,398                                   959                                   12,000                                  1,958                                   1,379                                   14,000                                   2,518                 1,799                                                    16,000                   3,078                                   2,219                 18,000                   3,638                                   2,639                                   20,000                                  4,198                                   3,059                                   25,000                                  5,598                                   4,109                                   30,000                                  6,998                                   5,159                                   40,000                                  9,798                                   7,259                           The table is, we believe, quite clear. Whilst everyone's circumstances will be different, it is likely that most self-employed people would be significantly better off. Limited companies are run by its directors (who are paid by a salary) and are owned by its shareholders (who are paid by dividends). In small companies the directors and the shareholders are the same people. The savings are achieved by paying the directors a low salary with the rest of the profits being paid to the shareholders as dividends. People operating their business as a sole trader will pay tax and national insurance at 28% on any of their income over £5,435. As a limited company, however, they will pay tax at no more than 21% on the same income. It seems too good to be true. There is, however, nothing particularly magical about this nor are you doing anything illegal. All you are doing is using the existing rules to you own benefit. It is, we believe, hard enough to operate a small business, without giving the taxman more money than you need to. We are, therefore, sure that for most clients:- OPERATING A BUSINESS AS A LIMITED COMPANY STILL SAVES MONEY. Everyone's circumstances are, however, different and we recommend that anyone considering operating as a limited company seek advice specific to their own particular situation.We have an information pack showing more details, which is available free of charge, on request. Contact Stephen Kendrew or Tracey Nixon at SHK for a free initial consultation to find out more details.