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Incorporation nation?

As I kick off my last column, I would like to thank both my avid readers for sticking with me – it is much appreciated.

Sometimes some quite devious results come from tax changes. One has occurred again following the Budget and Finance Bill.

Are you self-employed? Do you have self-employed clients? If so (numerically only) you and they are possibly operating under the wrong tax code.

People used to stay self-employed “for tax reasons” but now it may be that nearly everybody should incorporate for tax reasons – excluding those unfortunate “IR35” individuals.

When considering incorporation much more than the taxation implications needs to be considered – record-keeping, accounts, registration, returns to Companies House, capital gains, to “hold over” or not (in view of other proposed changes), exit planning, etc. This article considers tax on profits on an ongoing basis. What has happened to bring this about?

•Reduction in corporation tax to 0 per cent if assessable corporate profits are below £10,000 from financial year 2002.

•Reduction in corporation tax to 19 per cent if assessable profits are between £50,000 and £300,000 from financial year 2002.

•Widening of earnings limits for NI contributions for 2002/03 – even higher rates in 2003/04 – coupled with:

•Ability to take remuneration from a company (at least in part) by use of dividends (NB. profits or reserves must be available for dividends to be paid, which can make taking monthly dividend payments difficult).

•The defined-contribution pension regime with its attendant “basis year” structure.

The best way to put all this together is with an example.

Fruity Dee is aged 47. She is an importer and exporter of fruit and vegetables. Her self-employed earnings for tax year 2001/02 were £40,000. She contributed £10,000 to a personal pension plan (£7,800 net of basic rate tax relief). She can use 2001/02 as her “basis” year for defined contributions.

A comparison is shown contrasting the position if she remained self-employed for 2002/03 or incorporated her business (becoming the 100 per cent shareholder). It is appreciated that the tax rules for ceasing self-employment will apply.

For ease of calculation, it is assumed that the company accounting period commended on April 1 2002.

Fruity therefore enjoys “net” income of £3,609 more by the incorporation route (£26,345 rather than £22,736). It makes you think doesn&#39t it?

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