Graham from Inca Accounting outlines some changes that will have an impact on small businesses:
The new tax year starts on 6th April 2011 and there are a number of changes to the tax system which will likely have a considerable impact on small business owners.
The first change is an increase to the tax free allowance and also the amount that can be earned free of national insurance. If you own a limited company and draw dividends within the basic rate tax band, this change alone will save you around £300-00 per year in tax.
Corporation Tax is set to fall by 1% from April to 20%, whilst the sole trader is set to see a tax increase as class 4 national insurance rises from 8% to 9%.
What does this all mean?
In simple terms, this change makes the sole trader business less attractive than the limited company for businesses with profits within the basic rate tax band - specifically up to an annual amount of approximately £42K. The sole trader will be 9% worse off across most of this range.
Once higher rate tax kicks in, the sole trader starts to claw back this disadvantage, though only at a rate of 3% meaning profits would need to be substantial to fully claw back the situation.
There are additional costs associated with running a limited company and the administration is more time consuming, therefore in our opinion, a business would need to be making profits in excess of £15K per annum before considering a switch of status for purely tax reasons.
For businesses with profits in excess of £15K per annum and wanting to consider a change of structure, now would be a good time to give us a call on 01235 868888 as it would allow time for the incorporation, new bank account and any VAT transfer prior to commencing trade on 1st April 2011.
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