Becky; ♥ asked:
UK corporation tax rates are often much lower than income tax rates.
Why? Does that mean that if you are paying corporation tax, you do you not have to pay income tax aswell?
UK corporation tax rates are often much lower than income tax rates.
Why? Does that mean that if you are paying corporation tax, you do you not have to pay income tax aswell?
By running your business through a limited company you stand to save tens of thousands of pounds in tax and national insurance every year
Why? Is it because if you run a limited company you only have to pay corporation tax, which costs less than income tax that other types of businesses have to pay?
Income tax is payable by employees under PAYE every month.
A Company does not pay it but is taxed on it’s audited accounts profits after the end of the companies financial year.
I think you are asking whether to operate as a sole trader or as a limited liability company?
The statement you printed is somewhat misleading. If you run your business through a company and you are the sole employee, you will have a choice in how you are paid.
Option 1: You can pay yourself a salary and run the firm at breakeven. If you do this, you will have to pay income tax and both the employer and employee national insurance but not corporation tax. You might want to do this, for example, so that you can claim VAT back on your supplies or so that you can protect your personal assets from a possible lawsuit.
Option 2: You can decide not to pay yourself at all and run the firm at a fat profit. You will pay corporation tax on that profit. But you will have to pay yourself something if you want to eat so the firm will pay out a dividend each year. Now you will pay tax on that dividend and you probably will want to also pay national insurance at the self employed rate to make sure you have a pension.
If you are observant, you will see that, in option 2 you have been taxed twice on the same money.
As PolitacllyCorrect explained, you do not always save money on tax if you operate your business through limited company (LTD). It is subject to individual’s tax position. Some people maybe better off with sole trader and some people with LTD. You need to do a full tax calculation to figure out which one is most tax efficient.
Generally, with LTD companies, you get Capital Allowance on certain assets, other tax reliefs, 28% or 21% corporation tax rate and charged a notional 10% tax on dividend. On top, you also have your tax free personal allowance. Overall, it looks like LTD is more tax efficient but you will never know until you work out your tax liability under sole trader and LTD.
There are also short term and long term non-tax implications and unique advantages/disadvantages of operating as a Sole Trader or LTD. You may need to take these into consideration.