SAIF Golden Charter

Limited company is best?

One of the common statements that accountants hear is that of “I’ve been told that if I was a limited company I would save tax”. Now there are many reasons why someone might wish to trade through a limited company, and these may well be commercial, such as the need for limited liability, the ability to differentiate between ownership and management or to enable management incentives, and indeed it can be a way of reducing a tax bill.

However, the stark statement which we get, as is often the case with simple statements, does not ask the full question nor give the complete answer. Assuming there is no other reason why someone wishes to operate through a limited company, the starting point must be to ask the individual: “Do you want all of the money your business makes to be available personally?”

If the answer to this question is yes, then a limited company is probably not the best solution. If someone is looking to have all of the money available for themselves to spend, then tax will need to be paid on that income at the individual person’s rate and potentially the only savings which could be made are to National Insurance. In this circumstance then, the additional complexity and cost of being a limited company is probably not worth it.

So let us look at the common concepts people put forward as to why a company might save tax.

Surplus profits – If the company is making more money than the individual needs then the profits can be left within the limited company and the company tax rate of 19% is almost certainly less than the person’s rate of tax even before national insurance is considered

I can pay my spouse/child, etc. via my company and ensure I use their allowances – A very valid argument, but unless that person is a director as well then be sure the rate of pay can be justified for work done – there is tax legislation in place to challenge income splitting

I can have a low salary and regular dividends to avoid paying national insurance – Again a common strategy but it does have flaws. Only salary qualifies as remuneration for pension contributions and is often all that mortgage or loan companies will take into account. There is also a chance of challenge to dividends under disguised remuneration legislation. Dividends now also have their own additional tax rates

Some of the shares could be in my spouse/children’s names – Again a reasonable strategy but be aware of the potential challenges as well under income splitting and also the possible exposure if borrowings are involved. A simple partnership might work just as well.

Like all business decisions there is no standard answer nor solution, and every case needs to be looked at separately, but don’t ever let the tax drive the decision over business commerciality.