Corporation tax is a tax on profits that must be paid by limited companies, any foreign country with a UK branch or office, and a club; co-operative; or other unincorporated associations
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
In the Spring 2021 Budget, it was announced that Corporation tax main rate would increase to 25%, however, the government walked back this pledge in September of this year and then a few weeks later reneged on that promise as well. Understandably, you might be confused about what the tax rate will be.
New tax rate in effect
As of 1 April 2023, corporation tax will in fact rise from 19% to 25% as long as your turnover is £250,000 or more per year. Companies making £50,000 or less will be able to stay at a 19% tax rate and companies with profits in between these figures will be at a tapered rate.
With this in mind, what would the impact be if you move from self-employment (as a sole trader or as a partnership) to a limited company?
How the new rate could affect your business
Limited companies have a lot of benefits. A limited company is set up as a separate legal entity, protecting an individual from legal ramifications. It is also more tax-efficient and provides more potential for profitability — or at least it used to be before the tax rate hike.
Usually, limited companies have lower overall tax and National Insurance (NIC) costs because you’ll get income in both salary and dividend form. Dividend income is taxed more beneficially and is not liable to NIC. Corporation tax rates also tend to be lower than most income tax rates.
However, if you’re a relatively low earner, especially after the new corporation tax rates go into effect, being a limited company might actually mean you pay more tax. Generally, the bigger your annual profits, the more tax you’ll save by operating as a limited company.
If you are wondering at what point being a limited company is more beneficial, the best thing to do is to work with a professional.
Financial advice to help you decide what’s best
It’s important to remember that tax rates change all the time, so you must ensure that you pay the correct rate for your business when tax season comes around. When you are getting your finances in order, it’s imperative to work with a financial adviser as well as an accountant so you can be secure in knowing you’ve done all you can to prepare. Get in contact with the experts at Dental & Medical Financial Services today.