View more on these topics

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?


Bristol & West – Balanced Guaranteed Equity Bond

Thursday, June 6, 2002Type: Guaranteed equity bond and high interest accountGUARANTEED EQUITY BONDAim: Growth linked to the FTSE100, Eurostoxx 50 and Nikkei 225indicesMinimum-maximum investment: £2,500-£1mTerm: Six yearsGuarantee: Capital returned in full at end of term regardless ofmovement in indicesReturn: 70% of growth in indicesInterest rate: 4% gross a yearClosing date: July 31, 2002HIGH INTEREST ACCOUNTMinimum-maximum […]

Watson Wyatt attacks actuary changes

Watson Wyatt is criticising the FSA&#39s with-profits proposals, saying changes to the role of the appointed actuary weaken protection for consumers.The firm of consulting actuaries says the FSA&#39s changes – which significantly reduce the role of the app-ointed actuary and place more responsibility in the hands of company directors – will not make for better […]

FSA logo to be &#39badge of legitimacy&#39

IFAs will be able to use the FSA&#39s insignia in their marketing literature as a way of demonstrating their authorised status if proposals in its latest consultation paper are implemented.Consultation paper 138, Disclosure of Status under the Financial Services and Markets Act 2000 and Use of the FSA Logo, proposes to determine how authorised firms […]

Admin crisis on pension sharing

IFAs are struggling to find product providers which offer a complete service for taking on pension funds split by a divorce 18 months after pension-sharing legislation was introduced.Pension sharing allows a pension fund to be split in the event of divorce. The divorced spouse gets a credit which can be moved elsewhere.Friends Provident, Scot-tish Equitable, […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm