Calculating the tax benefits of incorporation

Produced by a Tolley Owner-Managed Businesses expert
Owner-Managed Businesses
Guidance

Calculating the tax benefits of incorporation

Produced by a Tolley Owner-Managed Businesses expert
Owner-Managed Businesses
Guidance
imgtext

The Incorporation ― overview guidance note details some of the key reasons why an unincorporated business may wish to incorporate. From a tax perspective, there are two key factors that will apply to all businesses considering incorporation:

  1. a different effective rate of tax on extraction of profits

  2. flexibility over income in respect of the timing and form of remuneration

In addition to these general factors, there will often be specific tax issues which may benefit particular business circumstances. There are a number of reliefs that are not available to unincorporated businesses. These reliefs may either relate to the taxation of the business’s profits or to its investors.

Effective rates of tax on profit

To ensure that a comparison of tax rates for sole traders and companies is meaningful, it is important that calculations compare like for like. It is therefore not useful to compare the rate of income tax and NIC on profits of a trade only with the rate of corporation tax. The sole trader is absolutely entitled to the profits

Continue reading the full document
To gain access to additional expert tax guidance, workflow tools, generative tax AI, and tax research, register for a free trial of Tolley+™
Powered by Tolley+

Popular Articles

Allowable deductions for employee-related expenses

Allowable deductions for employee-related expensesThis guidance note covers the tax treatment of some common types of trading expenditure relating to employees. Some of these are disallowable under general principles, for example the wholly and exclusively test or capital versus revenue expenditure.

14 Sep 2022 09:49 | Produced by Tolley Read more Read more

Carried-forward losses restriction

Carried-forward losses restrictionOverview of the carried-forward loss restrictionAn important restriction in the use of losses carried forward was introduced by Finance (No 2) Act 2017. Subject to a de minimis of £5m (known as the deductions allowance), most carried-forward losses are restricted to

14 Jul 2020 11:09 | Produced by Tolley Read more Read more

Married couple’s allowance

Married couple’s allowanceThe married couple’s allowance (MCA) is only available if one of the two spouses or civil partners was born before 6 April 1935. This means that one member of the couple must be at least 89 years old on 5 April 2024 to qualify for an allowance in the 2023/24 tax year.There

14 Jul 2020 12:13 | Produced by Tolley Read more Read more