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Preparing for business with ICAEW and X-Forces: part 3

Preparing for business with ICAEW and X-Forces: part 3

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19 Nov, 2018

Part 3: What business format should a start-up adopt?

By Clive Lewis, ICAEW, in conjunction with X-Forces

The business format a start-up adopts will affect the amount of tax it pays. It will also impact other areas such as liability for losses, so it should be decided after consideration of the issues. There are three basic business formats.

  1. Sole trader: this gives you complete control and fewer administrative burdens. But you have unlimited liability and could therefore risk personal loss. Sole traders include an annual self-employment return with their Income Tax return and pay Income Tax and National Insurance contributions on their profits.
  2. Partnership: partners in a business share profits or losses and unlimited legal liability. All partners include an annual self-employment return with their Income Tax return as well as a Partnership Tax return, and pay Income Tax and National Insurance contributions on their share of the profits.
  3. Limited company: a limited company is a legal entity separate from its owners. Companies file a Corporation Tax return with HMRC (HM Revenue & Customs), which summarises its annual trading results, and pays Corporation Tax on the taxable profits. Companies must submit annual accounts and other information to Companies House.

Important changes to the taxation of dividends from limited companies

From April 2016 important changes have been made to the way dividends (from limited companies) are taxed. The new system gives each taxpayer a new Dividend Tax Allowance of £5,000. Dividends received by taxpayers in excess of the dividend allowance (and any remaining unused personal allowance) will be taxed at 7.5% for basic rate taxpayers, 32.5% for 40% taxpayers, and 38.1% for 45% taxpayers. From 2016/17 a limited company format will be less tax efficient – a business needs to make profits approaching £40,000 to be tax efficient and to cover the costs of being a limited company.

Ready to go?

Register for X-Forces’ start-up and business planning support today at www.x-forces.com Help for businesses can be obtained from ICAEW’s Business Advice Service, in the form of a free, straightforward discussion with an ICAEW Chartered Accountant. Find out more at www.businessadviceservice.com

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