{"id":5748,"date":"2024-05-22T12:26:56","date_gmt":"2024-05-22T12:26:56","guid":{"rendered":"https:\/\/www.bainesjewitt.co.uk\/blog\/?p=5748"},"modified":"2024-05-22T12:26:58","modified_gmt":"2024-05-22T12:26:58","slug":"is-incorporation-still-the-way-to-go-for-solid-financial-planning","status":"publish","type":"post","link":"https:\/\/www.bainesjewitt.co.uk\/blog\/is-incorporation-still-the-way-to-go-for-solid-financial-planning\/","title":{"rendered":"Is incorporation still the way to go for solid financial planning?"},"content":{"rendered":"<p>From a tax planning perspective, incorporation of a business into a limited company has long been considered the gold standard in business development and growth \u2013 but is this still the right move?<\/p>\n<p><!--more--><\/p>\n<p>Our experienced team have explored the various benefits and disadvantages to give you a clear view of the best option for you.<\/p>\n<p><strong>Liability <\/strong><\/p>\n<p>The central issue around whether to incorporate your business or not is the question of liability.<\/p>\n<p>A limited company is its own legal entity, separate from you or other directors. When you operate as a sole trader, in comparison, you are not legally separate from your business.<\/p>\n<p>Incorporation carries several filing and registration responsibilities which aren\u2019t required as a sole trader or owner of a partnership.<\/p>\n<p>However, incorporation also means that you aren\u2019t personally liable for business tax and debts, offering a significant amount of protection when it comes to borrowing and investment for growth.<\/p>\n<p><strong>Profit extraction<\/strong><\/p>\n<p>Extracting profits from a partnership or as a sole trader is straightforward. The company is not legally separate from you, therefore profits are classed as your income.<\/p>\n<p>With a limited company, profits must be legally extracted from the business to be accessed for your personal use, which can be done through:<\/p>\n<ul>\n<li><strong>Salary<\/strong> \u2013 Paying each director a salary, sometimes at the value of their Personal Allowance for tax efficiency.<\/li>\n<li><strong>Dividends<\/strong> \u2013 A distribution of company profits to shareholders, taxed depending on your Income Tax band.<\/li>\n<li><strong>Director\u2019s loans <\/strong>\u2013 A way of borrowing money from your company without creating immediate personal tax liabilities.<\/li>\n<\/ul>\n<p>Planning profit extraction is essential to ensure that your personal finances are as efficient as possible.<\/p>\n<p><strong>Paying tax on profits<\/strong><\/p>\n<p>Tax is often a strong influence in the decision to incorporate your business or not.<\/p>\n<p>Limited companies may benefit from a lower overall tax liability, as they are subject to Corporation Tax on profits.<\/p>\n<p>This is charged at a rate of 19 per cent for profits below \u00a350,000 (small profits rate) and 25 per cent for profits above \u00a3250,000 (main rate).<\/p>\n<p>Profits in between these thresholds are subject to a gradually increasing rate of Corporation Tax from 19 to 25 per cent.<\/p>\n<p>In comparison, sole traders and business owners in a partnership must pay Income Tax on profits.<\/p>\n<p>Income Tax is charged at a basic rate of 20 per cent \u2013 rising to 40 per cent for yearly income over \u00a350,270 and 45 per cent for yearly income over \u00a3125,140.<\/p>\n<p>Additionally, the Personal Allowance is reduced by \u00a31 for every \u00a32 that you earn over \u00a3100,000, meaning you have no Personal Allowance if you earn over \u00a3125,140.<\/p>\n<p>This means that, as your business grows, incorporation could be the more tax-efficient choice.<\/p>\n<p><strong>Corporation Tax reliefs<\/strong><\/p>\n<p>As a sole trader or owner of a partnership, you can claim certain running costs, such as office costs, staff costs and travel expenses, as allowable expenses.<\/p>\n<p>These reduce your taxable profits and overall tax liability.<\/p>\n<p>However, as your business grows, you may be able to become more tax-efficient by incorporating and benefitting from Corporation Tax relief, including:<\/p>\n<ul>\n<li><strong>Capital allowances<\/strong> \u2013 Writing off plant and machinery costs against taxable profits<\/li>\n<li><strong>R&amp;D tax relief<\/strong> \u2013 Credit against qualifying spend on R&amp;D costs<\/li>\n<li><strong>Structures and buildings allowance<\/strong> \u2013 Writing off some construction costs for commercial buildings<\/li>\n<li><strong>Patent Box<\/strong> \u2013 Lower Corporation Tax rate of 10 per cent for earnings from patented inventions.<\/li>\n<\/ul>\n<p>These reliefs are only beneficial over allowable expenses if you make sufficient capital expenditure.<\/p>\n<p><strong>The drawbacks of incorporation<\/strong><\/p>\n<p>Each company structure has its challenges as well as its benefits.<\/p>\n<p>As a separate entity from its owners, a limited company carries filing requirements with Companies House and additional responsibilities for directors in the form of Director\u2019s Duties.<\/p>\n<p>March 2024 saw the introduction of higher Companies House fees for certain filing requirements, including filing a confirmation statement, incorporation and changing the name of your business.<\/p>\n<p>New regulations were also introduced, including:<\/p>\n<ul>\n<li>Explicitly confirming that the company exists for lawful purposes<\/li>\n<li>Greater powers for Companies House to query discrepancies<\/li>\n<li>Requirements for identity verification for UK business directors<\/li>\n<li>Requiring a registered email address when submitting a confirmation statement<\/li>\n<\/ul>\n<p>If you choose to incorporate, you must ensure that the company directors have the willingness and capacity to take on these tasks and meet filing deadlines on a regular basis.<\/p>\n<p>Additionally, the tax benefit of incorporation for directors may be decreasing as the dividend tax-free allowance falls.<\/p>\n<p>We can advise you on the right structure for your business and how to manage the challenges that accompany it, including how to navigate tax liabilities, filing responsibilities and profit extraction.<\/p>\n<p><strong>Contact a member of our team today to discuss how we can help you. <\/strong><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>From a tax planning perspective, incorporation of a business into a limited company has long been considered the gold standard in business development and growth \u2013 but is this still the right move?<\/p>\n","protected":false},"author":2,"featured_media":5751,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24,125,30,56,140,44,59,26,7,128],"tags":[],"_links":{"self":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts\/5748"}],"collection":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/comments?post=5748"}],"version-history":[{"count":1,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts\/5748\/revisions"}],"predecessor-version":[{"id":5749,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts\/5748\/revisions\/5749"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/media\/5751"}],"wp:attachment":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/media?parent=5748"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/categories?post=5748"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/tags?post=5748"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}