Should I form a company for my property empire?

Should I form a company to build my empire?

This is a question that I am frequently asked and unfortunately there is no simple answer because so much depends on your plans for the future and your current circumstances. However, I will try and give some guidelines. This will give you a starting point to discuss with your accountant or financial advisor.

Lets start with the basics.

A company pays Corporation Tax (CT) at 21% on profits up to £300,000. Above that there is a sliding scale but the maximum tax on its profits is 28%. This sounds good when compared to income tax at 20% on income up to £36,000 per annum and 40% above that. But the problem is the money is in the COMPANY and there will be further tax to pay when it is taken out for the shareholders use.

The term "Corporate Veil" is a term used by the courts to describe the relationship between a company and its shareholders. The point is that a company is a separate entity from its shareholders and its employees. It pays its own tax on profits and gains. It can be sued for its debts and is the legal owner of the money it makes. If the shareholders want to take money out of the company, getting it through the aforementioned 'corporate veil, will usually create a tax charge.
There are broadly speaking, five ways to extract cash from your company.

1. Wages, salaries and bonuses.

2. Dividends

3. Benefits in kind

4. Loans

5. Liquidation or share sales.

As this is a subject that can run over many pages, I will deal with a separate one each week, starting with Wages,salaries and bonuses.

As a rule-of-thumb, this is the most expensive way, because both you and the company will have National Insurance contributions to pay. For 2008/09 yours will be 11% up to a salary of £40,040 and 1% thereafter. The company will pay the employers contribution of 12.8% with no upper limit.. If the company is your only source of employment, no National Insurance contribution is due on wages of less than £105 per week.

In these circumstances, it makes sense to pay yourself and any shareholders, including family members who genuinely work for the company, this much per week. Because the company can claim the cost of your salary as an expense against its profits chargeable to corporation tax, there will be a saving of £1,146.6 (£105 x 52 weeks =£5,460 reduction in company profit (taxed at 21%) saves £1.146.6) as a result of paying a salary just equal to the NIC threshold. The income tax payable is neither here nor there, because if you were trading as an individual, you would have to pay that.

Next week, I will cover dividends.

If you can't wait for the next four exciting instalments, you can request the whole subject, just by emailing helpdesk@taxrefundmoney.co.uk and putting "Company Business" in the subject matter and I will arrange for a copy of the whole article to wing its way to you.