limited company status? - June 2004

Following the introduction of the 0% starting rate of corporation tax for small companies in 2002, many sole traders and partnerships incorporated their businesses to take advantage of the tax savings that became available.

Whilst it is true that the recent Budget has reduced the tax savings that can be achieved by incorporation, it is also true that the impact on most companies will not be as significant as originally feared.

The new rules mean that profits distributed as dividends will be subject to corporation tax at 19% but the following points should be taken into account:

· It is smaller companies that will be most affected, typically those with a profit of less than £25,000. However, even these companies will still pay less tax and NIC than if they operated as a sole trader or a partnership.

· If profits are £50,000 or more the changes will make no difference, as all profits are already taxed at 19% at least. The tax and NIC savings therefore remain at the previous level.

· If the new rules do apply, it is the company that pays the additional tax. In other words the tax position of the shareholder who receives the dividend is unaffected.

In summary, it is unlikely that any but the smallest companies will need to reconsider whether they should remain incorporated following the Budget changes. However if you would like to discuss the specific circumstances of your company, or are considering the incorporation of your existing business please contact Gary Ritzema or Andy Neeve at our Penrith office.

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