News

June 29, 2012 - Kasia

One million sole traders could benefit from incorporating

SMEs could be wasting £4.2 billion by not considering a change of business structure, according to new research.

Unbiased.co.uk’s Small Business Tax Action Report says that 246,000 partnerships and one million sole traders could potentially benefit from incorporating their business. The research finds that small firms could be paying billions in unnecessary National Insurance payments on their profits by not considering changing their business model to that of an incorporated business.

The report says that many SMEs are not making use of tax efficient ways of running a business and it claims there is an overall tax wastage by SMEs in the UK of £7.1 billion.

Owners of unincorporated small businesses are self-employed and when their earnings reach a certain threshold they need to pay National Insurance contributions as a percentage of the business’s annual taxable profits. These National Insurance contributions could be avoided by incorporating the business and taking a small salary up to the threshold at which National Insurance is payable, then taking the balance of post-tax profits as dividends, which are taxed at a lower rate.

Karen Barrett, chief executive of unbiased.co.uk, said: “Tax is a vast and complex subject and business owners often simply do not have the time to understand how to optimise their tax status whilst also running their business day to day. Our Small Business Tax Action Report reveals that by not considering incorporation, small businesses could be missing out on huge National Insurance savings. Whilst this option will not suit all businesses, it can be an effective way to save money and it’s well worth considering by businesses that meet the criteria.”

www.unbiased.co.uk offers a free and confidential search for small firms looking for an accountant or IFA.

Find out more

• Self-employed National Insurance