Advantages of Setting Up A Limited Company

There has been a steady growth in the number of self employed businesses, contractors and freelance consultants in the UK over recent years. This follows an influx of skilled professionals and wealthy businessmen from overseas to London which is seen as a “safe haven” in Europe. 

Self employed individuals can set up their business using the three principal methods in the UK – as a Sole Trader, Partnership or Limited Company. All three methods have their own distinct advantages and disadvantages and depend to an extent to the circumstances of the individual.

However, the most popular method is the Limited Company set up which is the most tax effective method for individuals earning more than £100,000. This is due predominantly to the advantages of taking income through dividend distributions. Basic rate taxpayers do not pay any tax on their dividend incomes and higher rate taxpayers pay an effective 25% marginal rate of tax which is significantly lower than the 40% higher rate tax on earnings. Individuals who earn over £150,000 and fall into the top rate income tax band will be subject to an effective rate of tax on dividend income of 36.1% which is significantly lower than the 50% imposed on sole traders and partnerships. Tax planning is crucial to high earners who could make significant savings if they are advised accordingly. 

At Belsize Accountancy we provide commercial and tax advice to minimise your marginal rate of tax and structure your financial affairs effectively. For more information please contact us on 0207 043 0052 or send us an email to tax@belsizeacountancy.co.uk.  

Tax Planning: Pension Contributions

The loss of top rate tax relief for pension contributions was not included in the 2012 budget as some people feared. Individuals can continue to make tax free pension contributions into their scheme up to the threshold set for each year. This is an effective form of tax planning particularly for individuals subject to the 50p top rate of income tax.

The pension threshold is £50,000 in 2012/13. Individuals are able to go back 3 years and contribute towards their pension allowance for those years. You must top up the current year first up to the required threshold and can then go back a further 2 years (go back to the furthest year first) and top up to £50,000 for each year. The pension contribution threshold cannot be exceeded in any of those years. A high rate taxpayer is therefore able to make tax free contributions of up to £150,000 in the current tax year.

Higher rate taxpayers would be advised to consider this in the current year whilst the top rate of tax remains at 50%. Pension contributions could effectively be brought forward to the 2012/13 tax year and reduced in subsequent years when the rate falls to 45%.

Each individual has a lifetime allowance of £1.8m, reduced to £1.5m from 2012/13, for which pension contributions are tax free. No tax relief is available once this threshold has been reached.

Tax planning: Seed Enterprise Investment Scheme (SEIS)

The HMRC have announced a new Seed Enterprise Investment Scheme (SEIS) which applies from 6 April 2012 and offers 50% income tax relief to individuals investing up to £100,000 per year in small businesses. This is not dependent on the individual’s marginal rate of tax and so investors will obtain 50% tax relief and effectively halve their tax bill.

The SEIS scheme is designed to help small business start ups to raise equity finance by offering tax reliefs to investors in order to incentivise them to purchase shares in new UK businesses.  The rules have been designed to mirror those of the Enterprise Investment Scheme (EIS).

Individuals can invest up to £100,000 per year in qualifying companies and start ups are able to raise a total of £150,000 under this scheme.  Investors can be Directors but not employees of the company and cannot hold more than 30% shareholding in order to qualify (including relatives and associates). The SEIS conditions must be maintained for a period of 3 years.

Other conditions are as follows:

• Requirements to be met at the time of issue of the shares

                 Company must be unquoted

                 Less than 25 employees

                 No more than £200,000 gross assets

• Any trade being carried on by the company at the date of issue of the relevant shares must be less than two years old at that date.
• Within three years of the date of the relevant share issue, all the monies raised by that issue must be spent for the purposes of a qualifying business activity
• The relief is given by way of a reduction of tax liability, providing there is sufficient tax liability against which to set it.
• For 2012/13 only, any capital gains that are reinvested in SEIS shares during the same tax year will be exempted from Capital Gains tax.

Whilst investing in small business start ups can be risky, the 50% tax relief offers significant incentive for Angel (or Seed) investors out there.