By Hayley Robins, Senior Accountant at Hive Business.
As Dental Accountants there are common questions that we get asked time and time again and, whilst our advice will always be tailored to your specific circumstances, this particular question used to be a “no brainer”. However, a series of subtle rules over the last couple of years has changed the landscape of the ‘incorporation’ decision.
What is Incorporation?
In simple terms, incorporation is a process that separates you from your business. Your business is held in a magical wrapper called a limited company which is a separate legal entity. This is important as it means the company has its own identity and tax regime.
Why do people incorporate?
The fact that a company has its own identity is appealing as there is a limitation of liability (i.e. the buck stops with the company and your personal assets can be safeguarded). Albeit banks can, and often do, ask for personal guarantees if they are lending to your company.
Some people also feel that having ‘Ltd’ after the trading also carries some kudos and adds an element of perceived success and trust in the business.
However, the main reason that businesses and individuals used to incorporate was the substantial tax savings that were available. Incorporation was viewed as a traditional and effective way to optimise your tax position, reducing tax exposure from 45% to as little as 20%.
However, everything changed in April 2016 with the introduction of the new Dividend tax rate. This sneaky rule change has largely eroded the tax savings that a limited company once offered. So, in broad terms, if you want to get your hands on everything you earn you will pay the same level of tax whether you’re a sole trader or a company.
So if there’s no tax benefit why are people still talking about it?
A limited company is still a potentially advantageous wrapper. Whilst it won’t save you tax on its own it’s a great platform to use to plan your affairs effectively and can still save you tax.
For example, if you are an associate saving to buy your first practice, you can retain funds in the company and save 25% tax towards your new venture.
At the other end of the spectrum, if you’re a practice owner or an associate who has been trading as a company for last few years, it’s inevitable that if you do nothing your tax exposure will now increase. However, if you’re prepared to take action Hive can still help you proactively mitigate your exposure.
We have a portfolio of tax planning methods, most of which can only be used in conjunction with a limited company. These methods are bespoke and depend on your current circumstances as well as your future plans.
Why not get in touch to see what would work for you, give us a call on 01872 300232 or email us at hello@hivebusiness.co.uk.
