Should you incorporate?

The planned increase in corporation tax has changed some of the mathematics on incorporation.

The planned increase in corporation tax has changed some of the mathematics on incorporation.

The Budget announced a significant change to corporation tax from 2023:

At present, from a tax viewpoint, it can be better to run a business via a company rather than on a self-employed basis. This is mainly because a company will allow the bulk of earnings to be received as dividends, thereby avoiding national insurance contributions (NICs). While this approach will still work for businesses with profits that would attract only the 19% small companies’ rate, it is a different picture for higher profits, as the example below shows.

Higher corporation tax bites

Phil’s business generates £100,000 of profit. If he has no other income, the tax situation as self-employed or as a company now and in 2023/24 is:

Self-EmployedCompany 2021/22Company 2023/24
Gross Profit£100,000£100,000£100,000
Salary£8,840£8,840
Taxable Profit£100,000£91,160£91,160
Corporation Tax(£17,320)(£20,407)
Dividend£73,840£70,753
Income Tax(£27,432)(£13,211)(£12,207)
National Insurance Contributions(£4,816)
Net Income£67,752£69,469£67,386

If Phil decides to incorporate, then the tax savings will turn into a tax loss after two years.

The decision on business structure should never be made based on tax alone as there are many other factors involved. However, the deferred tax changes announced in the Budget may tip the scales for some. As ever, advice based on your personal – and business – circumstances is essential.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

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