Is It Still Worth Becoming a Limited Company With The New Dividend Tax Rates?

Author: Russell Smith
August 26, 2015

In this post, RSA turns its attention to the world of dividends and limited companies, as we discuss whether or not you should become an LTD business, given the new dividend tax changes.

The 2015 budget brought into effect some new dividend tax changes. The rate changes have made some people cautious about starting a limited company over a sole trader business or a partnership. Their fear is that the changes could be more costly in the long run.

However, before you start to worry about starting a limited company, our accountants from Leeds have a few pieces of advice. We actually believe that it is still very much worth setting up your business as an LTD company.

Why?

The Dividend Tax Changes Will Save You Money

Despite the rate changes to dividend taxes, limited companies haven’t been hit as hard as you might think. The changes that come alongside the dividend tax adjustments, such as an increase in Class 4 National Insurance for sole traders, means that in the long term, you will actually save money if you open as a limited company.

While we aren’t aware of the exact figures yet, our expert accountants have worked out that most businesses will save roughly 4% on their taxes — if they follow the right procedures and put money in the right places. For help saving on tax, get in touch.

Another way limited companies will save is through corporation tax. With the announcement of the dividend tax changes comes another announcement that corporation tax will eventually fall from 20% to 18%. This reduces the costs of being a limited company even more.

You Have Greater Facilities for Planning

As a sole trader, you work, you are paid and the money enters your account. All money that enters your account is then taxed at the end of the year. For a limited company, things are different. Yes, all money that enters the business is taxed as corporation tax, but then it sits there.

This money will only be taxed again when it is removed from the business, but you don’t have to remove it right away. Now you can make plans to ensure your tax bills are as low as possible. This includes taking some out as non-taxable pensions, splitting it between dividends and personal income, setting some aside for future investment, taking out funds after the current tax year is over and much more.

Considering the dividend tax changes, it is a small victory, but one that still makes establishing a limited company worth it.

Split Your Income With a Partner

If your partner is earning less than you or is a homemaker, limited companies allow you to take advantage of tax allowances by splitting the income. We looked at this system in much greater detail in another blog post, but let’s quickly run over it again here.

Your partner has the same non-taxable income allowance as you do; they also have the same tax brackets of basic, higher and additional. As a sole trader, if you were to earn £80,000, you would use up your £11,000 allowance, then pay the basic and higher rate on the rest of the income.

If, however, you became a limited company, you could split that earning with your partner. Through this is a legitimate tax saving method, you could take advantage of both of your tax-free allowances, giving you a total non-taxable income double that of a sole trader: £22,000. You’d also be able to split the income 50/50, meaning you both technically brought home £40,000. Therefore, you’d only pay out of the basic tax band, providing even greater reductions in tax.

Advantages Unrelated to Tax

The dividend tax changes have not only been negated by the other savings you stand to make, but also the benefits that fall outside of the tax world. The advantages of becoming a limited company are many and vary in characteristics a great deal.

LTD companies often receive reduced rates on large-scale purchases from retailers, as they are seen as businesses that provide better value in repeat business and bulk buys. This all stems from another advantage of being a limited company: increased credibility. Being a business with a brand name, rather than a sole trader, gives the impression of a larger scale of operations. This is far more attractive to lenders, investors and consumers, ultimately giving your business a better reputation and better prospects.

Need help understanding the new dividend tax changes? Get in touch with our expert accountants from Leeds today!

0113 394 4616

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