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This article does not constitute advice. Professional advice should be taken prior to acting on any part of it.
Q. When should I start a limited company to save tax?
Answer: You might benefit from setting up a limited company once the income from your business reaches the higher rate tax threshold. Bear in mind, a limited company comes with higher running costs, more paperwork, and more legal obligations, but it is still beneficial in terms of taxes.
Compared to being a sole trader, a limited company opens up more options about how to handle the profits your business generates. Your income becomes the revenue for your company – free from income tax that a salary would be subject to. However, you will still have to pay corporation tax on these earnings. In the 2017/18, 2018/19, and 2019/20 tax years, corporation tax has been set at 19%.
From your company’s revenue, you can then take a salary, a dividend, or leave it in the company. Drawing a dividend is a great option since the tax rates are lower and National Insurance isn’t applicable.
Alternatively, limited companies can retain profits and distribute them as dividends in future tax years. If you’re aware of tax rates changing due to government or personal circumstances, you can defer income to another year when a lower rate is due.
If you are a doctor or dentist starting or growing a business, get in touch with an adviser to learn if creating a limited company is the best option for you.
Be sure to keep an eye on your profits – the process of setting up a limited company can be quite lengthy, so planning is key.