If You Are A Partnership, Should You Be A Limited Company?
Posted by Ben Williams on Mon, Feb 13, 2012 @ 09:15 AM
A very common question we get asked is “Should I be a Partnership, or would a Limited Company be a better option for me?”
Now, the answer to this question depends on a lot of factors, but for the point of this blog post, let’s pretend you are a partnership with a £200k turnover, £100k of which is profit.
If these were the only factors, chances are you would be better off as a Limited Company; certainly in terms of tax efficiency. As an example, let’s do a bit of maths (us accountants love maths!)
So, if you were a partnership, your tax bill would look something like this:
100k Profit, split between the two partners, so 50k profit each partner. Each partner’s tax bill would look like this:
£50,000 - £7,475 (Personal allowance for 2011/12) = £42,525.
£42,525 - £35,000 (Higher Rate Tax) = £7,525. So, £7,525 will be charged at the higher rate of income tax (40%) = £3,010.
The remaining £35,000 will be charged @ 20% Basic Rate Income Tax = £7,000.
Class 2 National Insurance (£2.50 x 52 weeks) = £130
Class 4 National Insurance (£50,000 - £7,225) = £42,475 at 9% = £3,822.75 and £300 at 2% = £6.
Total Class 4 National Insurance payments = £3,828.75
Total tax bill per partner = £13,838.75
So, each partner would pay £13,838.75 income tax for this specific tax year, meaning a total income tax bill of £27,677.50.
If you were a Limited Company, the company’s tax bill would look like this:
£589 per month, per director, tax-free salary = £14,136 tax-free salary (for both directors), which can be claimed as an expense against the company’s profits.
£100,000 - £14,136 = £85,864 @ 20% Corporation Tax = £17,172.80
No national insurance is included in this calculation, as each director is being paid just £589 per month, keeping them under the threshold for both Income Tax and Class 4 National Insurance contributions.
So, the total tax bill for the Limited Company would be £17,172.80 – £10,504.70 less than if you were a partnership!
So you can see from the example above that you would be better off as a Limited Company if it was based solely on the fact that you want to reduce how much tax you pay. Not only this, but it also includes £589 per month for each director, giving you more money in your pocket!
Obviously, as said at the beginning of this post, there are many other circumstances to take into consideration, for example, bureaucracy, red tape, responsibilities, pensions, finance, dividend payments… the list goes on!
If you think you could be better off as a Limited Company compared to a Partnership, or vice versa, book a free consultation now! – In the consultation, we will tell you exactly what would be involved in becoming an Limited Company, and whether or not it would benefit you.
