Is the Small Company Still Viable?

Newsletter issue - April 07.

The increase in corporation tax for small companies from 19% to 22% over three years is intended to discourage businesses from incorporating just to save tax. As from 2009 the corporation tax rate will be higher than the basic rate of income tax, which will apply on profits of up to about £43,000.

For 2006/07 the basic personal tax rate was 22% and the corporation tax rate 19% but by 2009/10 it looks like being the other way around with a basic personal tax rate of 20% and a corporation tax rate of 22%, an overall swing of 5% more tax for small companies!

However, an individual also has to pay Class 4 NICs at a further 8% on his self-employed profits, on top of the income tax due.

To assess the overall effect of these different tax charges, consider a business making profits of £50,000 in 2009. As a company it will pay corporation tax of £11,000. Trading as an individual the total income tax and NI payable will amount to £12,614, (assuming allowances increase in line with inflation). The tax saving for the company is thus expected to be about £1,600 per year. However the funds are held within the company, so transferring the money to the shareholder may create a further tax charge if that shareholder is already paying higher rate tax. Whether or not you plan to retain profits in the company for reinvestment will be a major factor to consider.

If you are considering forming a company, or want to stop using one, please come and talk to us first so we can work through the numbers. There will be a different answer for each business and at present in the 2007/08 tax year it is likely the company is still the best option.