Choosing the business vehicle

Produced by Tolley

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Choosing the business vehicle
  • Differing rates of tax
  • Sole trader or partner in a partnership
  • Company
  • Payment of tax on extraction of profits
  • Changes in NIC and dividend rates in 2022/23 and 2023/24
  • Losses in the early years of the business
  • Business vehicles and future plans
  • Non-tax considerations for business vehicles

Choosing the business vehicle

When a person decides to start in business, consideration should be given as to the most suitable type of entity for the business. This decision will depend on legal, commercial and administrative factors, as well as taxation.

When advising on which type of business vehicle to choose, this guidance note summarises the main tax considerations in deciding which business structure is appropriate for the business owner. A comparison document which summarises both practical and tax differences can be found in the Starting the business ― overview guidance note, together with checklists of the various issues to consider.

Differing rates of tax

Rates of tax and NIC are different depending on the type of business vehicle used. In 2021/22, the following rates apply.

Sole trader or partner in a partnership

A sole trader or partner in a partnership will pay income tax at rates of 0%, 20%, 40% and 45% on the profits generated by the business they run, depending on the level of profits they generate and the other income they have. See the Proforma income tax calculation guidance note.

In addition, they will pay NIC of Class 2 at £3.05 per week and Class 4 at 0%, 9% and 2% of profits depending on the level of profits generated. See the Class 2 national insurance contributions and Class 4 national insurance contributions guidance notes.

Company

A company will pay corporation tax at a rate of 19% prior to 1 April 2023 and between 19% and 25% (depending on the level of profits) from 1 April 2023 as well as NIC at a rate of 13.8% of remuneration paid to employees above a weekly salary of £170. See the Computation of corporation tax and Overview of NIC Classes, rates and thresholds guidance notes.

Payment of tax on extraction of profits

For a sole trader or partner, the above tax amounts and NIC are the only amounts they will pay on the profits, whereas for shareholders there is an extra layer of

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