The following case study gives an indication of the tax savings that may be achievable for the current year (2002/03).
Gemma and Peter have been in partnership together for a number of years sharing profits equally. During the year to 31 March 2003 they expect to make profits of £60,000.
They are both unmarried with no other sources of income. They would not be caught by the IR35 Personal Service Company rules if they were to form a company.
The total potential annual tax savings from operating as a company rather than a partnership are shown below.
| Partnership - per partner |
£
|
£
|
||
| Income tax (2002/03) |
|
|
||
|
|
|
||
|
-
|
|
||
|
192
|
|
||
|
5,162
|
|
||
|
|
5,354
|
||
National insurance (NI) |
|
|
||
| Class 2 52 x £2 |
104
|
|
||
| Class 4 (£30,000 - £4,615)@7% |
1,777
|
|
||
|
|
1,881
|
|||
|
|
£7,235
|
|||
| Total tax & NI liabilities for Gemma & Peter (£7,235 x 2) |
|
£14,470
|
Both Gemma and Peter take a salary of £4,615 from the company on which there will be no tax or NI.
Assuming that both Gemma and Peter are directors of the company and do not have formal employment contracts, the national minimum wage regulations will not be an issue.
This will leave profits in the company of:
[£60,000 - (£4,615 x 2)] = £50,770.
Corporation tax on the profits will amount to £9,646 being £50,770 @ 19%.
This will then leave post-tax profits in the company of £41,124 (ie £50,770 - £9,646).
This can then be paid out as a dividend of £20,562 (net) to each of Gemma and Peter.
This level of dividend will not cause either of them to become higher rate taxpayers and therefore there will be no further liability on these amounts.
The total liability is therefore £9,646 of corporation tax in the company representing a total saving over the unincorporated alternative of £4,824.
If either Gemma or Peter had paid pension contributions this would affect the calculation as would any benefits from the company. Generally, it would not be advisable to run a car through the company because any taxable benefit would be likely to negate the tax savings available from incorporation.
Remember that the tax savings indicated are based on current tax legislation. It is possible that the legislation may be changed so that incorporation is no longer beneficial.