With the increases in dividend tax announced in Budget 2025 last week, should you still be a Limited company?
Here's a list to help you weigh up the good and bad of each option:
Limited Company Advantages
- Limited Liability. Helping protect your home and other assets from unpaid creditors and other claims. With a bit of prestige thrown in.
- Spread Your Income Tax And NI Bill. If you have fluctuating profits, you can choose when to take your money out of the company whether as salary or dividends and therefore when to pay income tax and NI.
- ....Therefore Also Protecting You From Certain Thresholds: £35,000, £50,270, £60,000 To £80,000, £100,000 And £125,140. If you can live off the net of tax figures, you can ensure you keep your winter fuel payment, remain within the basic rate band, keep your child benefit, keep your tax free personal allowance or keep out of the additional rate tax band.
- Pension Payments. Your company can pay up to the annual £60k saving corporation tax whereas the tax benefit to a sole trader up to £50k is via your pension pot, not saving you any current income tax.
- R&D Claims, SEIS Investments Are Available. If you want to benefit from R&D tax claims and to encourage investors who benefit from tax breaks to invest in you, you have to be a Limited company.
- Cycle To Work Scheme. This has to be offered to everyone and the bike used more than 50% of the time for commuting or business journeys. The bike is lent to you and you then buy it from the company at a second hand value a few years later.
- Private Health Checks (Annual - £No Limit). A little known annual exemption regardless of any other taxable private healthcare arrangements you may have.
- Eye Tests And Flu Jabs (Annual - £No Limit). Eye tests assume you need a test because you use a computer monitor, which is most of us!
- Relevant Life Policies (£Not Excessive). A death in service policy where neither the premiums paid by the company or the benefits paid out are taxed on you or your beneficiaries. IFA advice is recommended.
- Tax Free Trivial Benefits (£300 pa). Each benefit must cost less than £50 Incl VAT otherwise the whole amount is taxable.
- Annual Parties (£300 pa). This can be a summer party as well as a Christmas party. Everyone has to be invited and it’s £150 Incl VAT per person plus £150 Incl VAT for a guest. Again, if you spend more than this including on extras such as taxis, the whole amount is taxable.
- MTD Doesn't Apply! No quarterly reporting to HMRC required which now looks as though it might become tax payments dates for sole traders. The 9 month delay in paying corporation tax might therefore start to look very useful.
Sole Trader Company Advantages
- Cheaper To Maintain. No need to prepare a balance sheet, statutory accounts, corporation tax returns, PAYE returns or companies house filings. An option to use cash accounting.
- Lower Tax If You Spend All Your Profits. At many profit levels the total income tax, NI and corporation tax due is lower for a sole trader where all the profit is taken out. Clearly, you must run the numbers!
- Flexible Use Of Losses. These can be offset against up to the previous three tax years taxable income such as employment income or rental profits to generate income tax refunds.
- Easier To Cease Trading. If your business doesn't work out, it's easy to stop trading whereas a company needs to be subject to a formal strike of liquidation.
- Lower Tax On A Sale. If you sell your trade and assets you'll likely pay 14%/18% capital gains tax up to £1m and that's the end of the tax due, but if a company sells its trade and assets it's subject to corporation tax followed by income tax or capital gains tax when you take the gains out of the company.
You'll appreciate that advantages become disadvantages for each option!
With tax 'the devil is in the detail' so always check with your accountant before taking any action.
Rob Glover FCCA
Tel 07831 273471
https://robglover.net/
https://onthespottax.co.uk/tax-accountants/london-north-home-counties-accountants/rob-glover-fcca
