Shorten Your Journey to Business and Personal Success
According to a new survey carried out by Alliance & where ID_NUM=9270;Leicester, one in five small business owners view tax astheir greatest concern. The Chancellor has announced in hislast budget that companies with profits below ?10,000 willnot have to pay any corporation tax with effect from 1 April2002. The question to be asked is: does that announcementmake incorporation a more attractive option compared tobeing a sole trader?The answer is that from a tax point of view, it isadvantageous to trade through a limited company as longas the income is drawn from the company by the owners asdividends from their shares and the amount of dividendsdrawn is restricted below the 40% band rate (i.e. ?31,063for tax year 2002/03). That way, the owners have no furtherpersonal tax ("income tax") to pay.
Moreover, dividends arenot subject to national insurance contributions. This isexcellent news of course. But, if dividend income fallswithin the higher rate bracket of income tax (i.e. above?34,515), they will be taxed at 22.5% on the excess, whichof course will increase the tax burden. The company profitsare subject to corporation tax rates.
Those are lower thanincome tax rates.The most catastrophic scenario is when the director takeshis reward from the company as salary. Then his/her salaryis taxed at income tax rates (like a sole trader's income).That is because, unlike sole traders, the tax system treatscompanies as separate from their owners because a company isa separate legal entity. The problem is that the incometaxes are higher than corporation tax rates. On top ofthat, they will be subject to employee and employer nationalinsurance contributions, which of course increase the taxburden and render his position worse than even anunincorporated business ("sole trader"), because NIC Class 1on payroll are higher than NIC Class 2 paid by selfemployed.In contrast, a self employed person ("sole trader") is taxedat income tax rates on the profits from his business, whichare added to his other sources of income. As it has alreadybeen mentioned, income tax rates are overall higher thancorporation tax rates.
On top of income tax, nationalinsurance contributions class 4 are payable on the businessprofits within a specified band (7% on profits between?4,615and ?30,420). National insurance contributions Class 2are also paid by self-employed people, although those arelower than those payable by company directors on theirsalaries.To illustrate the above, let's take a simple example. Wehave a limited company and a sole trader. They both make?60,000 profits each in the tax year 2002/03. We assume thatthe company director takes a salary equal to the amount ofhis personal allowances (untaxed income) of ?4,615 and thebalance as dividends.
The company will pay corporation taxat 19% equal to ?10,523 and nothing else. The sole traderwill pay income tax ?16,542, National insurance Class 2 ?104and National insurance Class 4 ?1,806. Total ?18,452. Thebottom line is that the person that has incorporated hisbusiness into a limited company will make a tax saving of?7,929 compared to a sole trader! Isn't that fantastic?Somebody might be wondering: why is this entire happening?The official explanation is that, this government, to helpthe economy grow, encourages people to leave as much profitswithin their businesses to be reinvested, instead of beingtaken out and spent.The "unofficial line" is that, as a matter of fact, foryears the Inland Revenue has tried to reclassify theself-employed. The 1% in NIC hike on staff salaries abovethe NIC threshold from next April adds to both theemployees' and employers' tax burden and may more thanoffset the saving from the corporation tax zero rate on thefirst ?10,000 of profits.Aren't there any other matters to consider in decidingwhether to incorporate or not?Higher administration costs to comply with company law,payroll and bookkeeping is one factor.
Another issue ispension planning. Extracting profits out of the company asdividends rather than salary means that there will be no"net relevant earnings" and therefore pension contributionscan't be made. But the advent of stakeholder pension planshas meant that contributions up to ?3,600 per year can bemade without the need for any earnings. If a person does notwish to transfer funds in existing plans into stakeholderbecause of high charges, there is a way out: the best netrelevant earnings (i.e. salary) in five consecutive yearscan be used for making contributions for the next fiveyears, even if there were no salaries in the remainder fouryears.
It is comforting to know that entitlement to basicstate pension is not affected by taking a salary from thecompany at the level of a person's personal allowances i.e.?4,615.Furthermore, an individual may decide not to bother withpension plans and instead invest in ISA. Often, these can bemore efficient than pensions but that's beside the scope ofthis article. If that option is taken, no salary isnecessary.Another factor is business motoring. It might be taxadvantageous for an unincorporated business that owns manycars not to incorporate because if these cars have someprivate use there will be benefits in kind taxed on theusers. These are generally higher than the straightapportionment between private and business for all carrunning costs in the case of sole traders.The conclusion is that there can be considerable tax savingswaiting the sole trader who decides to go down theroad to incorporation.
But, one needs to proceed withcaution and careful planning. And don't forget the biggestadvantage of incorporation, which is Protectionfrom Personal Liability. Incorporating is one of the bestways to protect a business owner from personal liability.Shareholders of a company are generally not liable for theobligations of the company. Creditors of a company may seekpayment from its assets, but not the assets of theshareholders. This means that business owners may engage inbusiness without risking their homes or other personalproperty.Thank you for taking the time to read this Article.
I hopeyou've found it useful. If you have, please drop me an emailand let me know what you think.You can email me at...constantinesavva@accamail.comAlternatively, you can visit our website athttp://www.tax-accounting-london.info and read a series ofother full length articles that present the complete pictureon a variety of interesting topics.If you would like to know how to save tax and make sure thatmore of your hard earned cash stays with you to expand yourbusiness and increase your profits, we have a Free SpecialReport addressed to small businesses either starting up oralready in business. This Exclusive Free Special Report isavailable automatically when you subscribe to our regularseries of Free Newsletters on finance advice and taxplanning by visiting our subscription area on our websitewww.tax-accounting- london.info. It is complied from reallife situations dealing with small business tax affairs forover 10 years and it is loaded with down-to-earth advice andpractical, understandable examples.LEGAL NOTICEWhilst every care has been taken in the preparation of thisarticle, the author cannot accept responsibility for anyerrors or omissions. Proper professional advice should betaken at all times.We retain copyright for the contents of this article.
Anyunauthorized copying or onward distributions are prohibitedwithout our consent..
Tax Time Uncovers Investor Abuse
Tax time brings out the fraud. Whether discovered by preparers or the taxpayer, individual investors who may have been abused by their stockbroker or firm typically find out now, when they are preparing tax filings, that they may have been burned in the prior year. Why? Monthly and year end statements are being reviewed. The investor or preparer may see securities never authorized, a pattern of active buying/selling that was not discussed or that was not consistent with goals and objectives. A concentration in one stock or sector may appear where it did not before.
So, it is now, at this time of year, that potential victims of Wall Street learn or suspect that they may have been abused.What to do? That's the big question. It is the story not often told. The true story of something great for burned Main Streeters: Securities arbitration. With it, investors can take their grievances before a panel who will determine if their claim is valid and to what extent Wall Street should recompense...
Tax Time Uncovers Investor Abuse
Tax help > Tax Time Uncovers Investor Abuse
Reyes Consulting Financial Advisors Introduce an Innovative New Tax Saving Strategy, the Family Advantage Program
(ContentDesk) October 1, 2005 -- Reyes Consulting is excited to offer its newest strategy in aiding clients with liquidating appreciated assets without realizing capital gain taxes.
This solution, implemented by a California Bar Board of Legal Specialization Certified Tax Law Specialist, we refer to as the "Family Advantage Program (FAP)."
The program uses a unique combination of tax strategies that benefit not only individuals and their families, but also their charity of choice. This program, unlike traditional tax and charitable planning strategies, brings substantial benefits to both the client and the charity.
All assets are at all times under the control and management of designated family members.
A charity of choice will not only benefit annually, but also upon the death of the client.
Additionally, the client's estate is not reduced.The program was introduced by Reyes Consulting Financial Consultant Brian S. Samuels, LUTCF.
Tax help > Reyes Consulting Financial Advisors Introduce an Innovative New Tax Saving Strategy, the Family Advantage Program
Tax Relief Company Opens Second Office to Meet Growth in IRS Tax Problems
Citizens Tax Relief (CTR), a New Canaan, Connecticut tax relief firm, announced they have opened an office in Los Angeles, California to serve the growing need for IRS tax debt settlement. The firm, led by specialized tax attorneys and financial experts, settles IRS tax debt for qualified individuals and businesses.????
"With the increase in inquiries for tax relief information on the West Coast, we felt it was important to have a presence there," said Terry O'Rourke, CTR President.
There are a number of tax relief programs offered by the IRS today that can help a taxpayer get a fresh start.
However, most taxpayers are not aware...
Tax help > Tax Relief Company Opens Second Office to Meet Growth in IRS Tax Problems
Refinancing your home - How and why?
Chances are you may need a little extra money to get some work done around the home or perhaps your current interest rate is 7.5% and the prime interest rate is 6.0% there is a benefit to restart the clock on an existing mortgage and save thousands of dollars over the life of the loan. The first thing you must realize is that refinancing your home can also be tax deductible, meaning that you will receive an extra tax advantage for the closing costs associated with a refinancing no matter what the condition, even in bankruptcy!The first step of refinancing your home is finding a reputable lender that will get the job done right the first time. Think of refinancing similar to purchasing your home, as the same information is necessary in order to get started. You will need to produce the same documentation that verifies who you are, how much you make and what you currently owe. A reputable finance company will shop your loan around to several lenders and get you an acceptance in a matter...
Refinancing your home - How and why?
Tax help > Refinancing your home - How and why?
Government Performance Project Releases States Grades: Alabama Earns C-; Services Suffer as Voters Reject Tax Hikes
The Government Performance Project's (GPP) "Grading the States 2005," gave Alabama a C-, matching California for the lowest grade in the country. These conclusions are based on the research released today by The Government Performance Project, the nation's only comprehensive, independent analysis of how well each state government is managed.
States are assessed on a scale of A-F for their management in the categories: Money, People, Infrastructure and Information. Alabama can be compared to the country's other 49 states at http://results.gpponline.org/Alabama and in the February issue of Governing magazine. The project is funded by The Pew Charitable Trusts.
According to Project Director Susan Tompkins, the quality of management performance by state governments is often critical to the success of a state's programs and policies. "The last few years have seen the biggest financial crisis for state governments...
Government Performance Project Releases States Grades: Alabama Earns C-; Services Suffer as Voters Reject Tax Hikes
Tax help > Government Performance Project Releases States Grades: Alabama Earns C-; Services Suffer as Voters Reject Tax Hikes
Tax help
This page loaded in 0.03205 seconds.