Small or self-employed businesses may be tempted to become limited companies by the changes laid out in the Chancellor's Pre Budget Report this week, according to claims accountants and financial advice provider Old Mill.
Alistair Darling's decision to delay the planned one per cent rise in corporation tax for another year, and to increase National Insurance by one per cent from April 2011 are the factors which Old Mill believes could encourage incorporation among more firms.
Old Mill's tax planning specialist Catherine Vickery explained the logic behind this: "Through his pre-budget report, the chancellor may well have inadvertently encouraged many small businesses and self employed people to consider becoming limited companies in order to enjoy the ‘tax breaks’ such a change would offer."
Under the current system, companies that make less than £300,000 profit pay 21 per cent corporation tax, while a self-employed individual making profits of more than £44,000 has to pay 40 per cent tax. From April next year, if profits are in excess of £150,000, they will have to pay the new higher tax rate of 50 per cent.
Ms Vickery explains that if a self-employed individual falling into the latter bracket become a limited company instead, they could then pay themselves a salary and ensure they stay within the basic rate of tax. "If they need more income, they can pay themselves in dividends, saving themselves a considerable amount of tax," she said.
And because the National Insurance Contribution is salary-based and unaffected by total income, incorporation is made even more attractive by the one per cent rise in NIC set to come into affect in the next tax year.
"Therefore, if a small business or self employed business was to become a limited company, they would only have to pay national insurance on the salary they paid to themselves and not the total profit earned," Ms Vickery added.
© Fair Investment Company Ltd