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Setting up and running your business in the UK through a limited company structure can provide some useful tax relief benefits compared to operating as a sole trader. Here is an overview of some of the key tax reliefs available:
Corporation Tax Rate: One major benefit is the lower corporation tax rate for limited companies. The current corporation tax rate is 19% on all profits. This compares favourably to the higher income tax rates if operating as a sole trader, which can be as high as 45%. Paying less tax at the company level means more profits left over to reinvest in the business or payout to shareholders.
Tax Deductible Expenses: With a limited company, expenses incurred wholly and exclusively for the trade are tax deductible. This means things like office supplies, mileage, phone bills, computer equipment, accountancy fees etc, can all be deducted against profits before corporation tax is applied. The tax relief on allowable expenses lowers the company’s overall tax liability.
Capital Allowances: Capital allowances enable the costs of capital assets to be written off against corporation tax over a period of time. Items like machinery, vehicles, computers and other plant and equipment used in the business qualify. So the cost of these assets can be deducted from profits in instalments, according to specified rates and timescales. This spreads tax relief on major capital expenditures over several years.
Research and Development Tax Credits: If your company engages in innovative R&D projects while developing new products and services, it could qualify for valuable R&D tax credits. These extra tax reliefs reduce your corporation tax liability and are worth up to 33% of qualifying R&D costs. There are also R&D allowances available on capital assets used for R&D.
Creative Industry Tax Reliefs: Specially targeted tax reliefs exist for companies in the creative industries, such as film, TV, animation, video games and theatre production. Reliefs on qualifying film production costs can be worth up to 25% of expenditures. For some live theatre and orchestra productions, relief can be as high as 45% of the costs.
Patent Box: The patent box scheme allows companies to apply a lower 10% corporation tax rate to all profits from patented inventions and certain other qualifying intellectual property like copyrighted software. The company must own or hold exclusive rights to use the patented inventions to benefit from the patent box.
Loss Relief: Trading losses can be offset against other income from the same accounting period or carried forward to be offset against future profits, reducing tax bills in later years. Loss carry-back rules also allow current-year losses to get tax relief against the previous year’s profits.
Tax-Free Dividends: One advantage of limited company ownership is that dividends paid to directors and shareholders are tax-free for basic-rate taxpayers. Dividends above the £2,000 annual allowance are taxed 7.5% for basic rate band payers. Additional rate taxpayers pay dividends at 32.5%, which is lower than their income tax rate.
Individual Tax Benefits: As well as lowering company tax, there can be personal tax benefits for director-shareholders. They can split income between salary and dividends to optimize the use of personal allowances and lower tax bands. Strategies like paying dividends instead of a salary enable avoiding National Insurance contributions.
Pension Contributions: The company can make employer pension contributions for director-shareholders and staff. Contributions reduce corporation tax liability. The company could agree to match employee pension contributions to a set level. As a company director, you can make personal pension contributions too and benefit from income tax relief.
Tax Planning Opportunities: A limited company structure offers more flexibility for tax planning and arrangements only sometimes available to sole traders. Working with an accountant, directors can minimize their tax liabilities through things like:
- Splitting income with a spouse who is also a shareholder and director
- Making pension contributions and taking income as dividends
- Timing of dividends to take advantage of lower tax bands
- Claiming allowable expenses like mileage, travel and subsistence against tax
Operating through a limited company can provide multiple tax reduction opportunities compared to being self-employed. However, proper company setup, record keeping, accounts and tax compliance are required to benefit from these. Consult our tax advisors for tax compliance and Limited Company accounts filling.