The advent of 25% corporation tax could make incorporation a less attractive option.
The arrival of higher rates of corporation tax for companies with taxable profits of over £50,000 is still more than two years away, but anyone considering incorporation now or in the near future would be well advised to check out the mathematics based on their expected circumstances.
Looking at the numbers produces the following graph:
For the company calculations it is assumed that the director draws from gross profits a salary equal to the secondary national insurance (NIC) threshold (£8,840 in 2021/22), thereby sidestepping all NICs (employer and employee), with the balance of profits taxed at the appropriate corporation tax rate and then paid out in full as dividends (with the full £2,000 dividend allowance available). The mathematics brings out the following points:
Self-employed £ | Dividend £ | |
Gross marginal profit | 1,000.00 | 1,000.00 |
Marginal corporation tax @ 26.5% | N/A | (265.00) |
Dividend payable | N/A | 735.00 |
NIC @ 2% | (20.00) | N/A |
Salary | 980.00 | N/A |
Marginal income tax @ 40%/32.5% | (400.00) | (238.88) |
Marginal net income | 580.00 | 496.12 |
Self-employed £ | Dividend £ | |
Gross marginal profit | 1,000.00 | 1,000.00 |
Marginal corporation tax @ 26.5% | N/A | (265.00) |
Dividend payable | N/A | 735.00 |
NIC @ 2% | (20.00) | N/A |
Salary | 980.00 | N/A |
Marginal income tax @ 40%/32.5% | (450.00) | (280.04) |
Marginal net income | 530.00 | 454.96 |
Self-employed £ | Dividend £ | |
Gross marginal profit | 1,000.00 | 1,000.00 |
Marginal corporation tax @ 26.5% | N/A | (250.00) |
Dividend payable | N/A | 750.00 |
NIC @ 2% | (20.00) | N/A |
Salary | 980.00 | N/A |
Marginal income tax @ 40%/32.5% | (450.00) | (285.75) |
Marginal net income | 530.00 | 464.25 |
The overall result is that above about £59,000 of gross profits, the 2023 corporate route will be less attractive than its 2021 counterpart and worse than self-employment for gross revenue of above £140,000.
The blip in the graph between about £100,000 and £150,000 is because of the impact of personal allowance tapering. With no grossing up of dividends, it requires £91,160 of dividends plus £8,840 of salary before taper bites – equivalent to about £127,800 of gross profit. Once that happens on the corporate side the benefit drop off is sharper – which can be seen between £150,000 and £180,000 of revenue.
NB This exercise is looking only at the tax and NIC numbers. There will be many other factors (and costs) in the incorporation decision, e.g. the 130% super-deduction allowance is only available to companies.
For further advice on incorporating your own business, please contact us here.
Source: Techlink.
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