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Small businesses could save billions by going limited

June 27, 2012

A professional services site says that small businesses could be ‘wasting’ over £4bn each year in unnecessary taxes by setting up as sole traders and partnerships rather than taking the limited company route.

The site, unbiased.co.uk, has calculated that the 246,000 partnerships and over one million self employed people in the UK are paying £4.2bn in extra income tax and National Insurance Contributions that they would if they all incorporated.

This amount makes up the greatest proportion of the overall £7.1bn that SMEs ‘waste’ in tax each year.

Under the limited company model, dividends are not subject to NICs, which is the biggest reason why a tax gap exists between the self employed and limited company directors.

Limited company directors are also able to put into place tax planning measures far easier than sole traders – for example, they may decide to postpone drawing dividends in one tax year until the next, to minimse their higher rate tax liabilities.

There are also opportunities to split shares with a spouse, to make the most of two individual tax allowances – a benefit which is not available to the self employed.

Of course, the research has taken a very simplistic view of the differences between setting up as self employed vs. forming a limited company.

The tax benefits of incorporation are well known, but for many people the ease with which they can become self employed, without any of the administrative responsibilities which area associated with running a limited company is just as important a consideration when considering which business structure to use.