Sole trader/Partnership versus Limited Company issues and Director tax saving strategies
Sole trader and partnerships
Quite often these statuses are most appropriate when you set up in business, and can remain so until your profits rise above a trigger threshold, after which time it can be wise to switch to Limited Company status. Part of the reason for incorporating as a Limited Company is that your income can be restructured so that you draw mostly in the form of a ‘dividend’ which entails ‘employer’ and ‘employee’ not paying National insurance contributions on that dividend. Limited companies also limits its liability to money invested into that firm, and not to your broader asset base as an individual.
We have Accountancy links who will be able to assist you in making these decisions for your business so please ask us if you would like to be referred to one of them for a consultation.
Limited Company and Director Interaction
Directors loan strategies – lending money to the Company and later drawing down income from it tax efficiently.
The ‘Company’ has the ability to make pension contributions on behalf of the member/director, and obtain 20% corporation tax relief on it as an allowable deduction/business expense. This solves the problem of the member only being able to make small employee contributions which are normally capped at the lowly set annual salary.
Such contributions are allowable over and above salary and dividend drawings without taking the director into higher rate income tax territory
Subject to continually checking that balances stay relatively low compared to the net assets of the business, the Company can invest money rather than leaving idle cash sitting earning paltry rate of interest. This gives the double advantage of not having to draw excess money out of the business as personal drawings and suffering higher rate tax, with targeting higher net growth rates over the fullness of time (whilst acknowledging there will be investment risk to the capital, so the best use for this type of strategy is for long term money holdings over and above day to day cash flow and earmarked corporation tax liabilities)
Another great tax break is taking out life cover as a director, in the form of what’s called a relevant life plan (RLP). With RLP’s, your Limited Company can pay the premiums and get 20% tax relief on the contributions, as long as there is an employer/employee relationship in the policy contract. Not only that, but the employee does not suffer personal tax as a ‘benefit in kind’ as so often happens on employee benefits, and no tax or national insurance is charged to the level of the premiums. Finally, the sum assured can be payable to personal beneficiaries free of tax.
In the end analysis, the final overall cost to a Company can be as much as 50% lower than an alternative life cover taken through the firm, as a result of all these tax breaks.