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National Insurance And The Limited Company

 By

Julie Butler - Expert Author

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17 October 2011

The limited company does present to the taxpayer some significant advantages which have been particularly highlighted with the introduction of the 50% rate of personal income tax from 6 April 2010.

The ability to withdraw money from the limited company for the owner/director via the dividend route has been particularly helpful to the business community and an incentive for small and medium businesses to trade through the protection of the limited company and to enjoy the tax advantages.

One of the advantages of the limited company and the 50% rate of tax is that income tax is only paid when money is withdrawn from the company based on the date of withdrawal. Therefore if large profits are accumulated and not drawn out, there will only be a corporation tax liability for the company (at either 21% or 28%) and there will not be an income tax liability at the higher rate until the money is actually drawn.

Another advantage of the limited company is the National Insurance position of the dividend. A salary at the wrong level will attract a National Insurance liability whereas dividends at any level will not. Given the recent increase in both the employees and employers rate of National Insurance 12% and 13% respectively, this tax advantage is more pronounced.

The self-employed businessman who has not incorporated has some quite hefty liabilities with regard to National Insurance (class 2 and Class 4) which increased with the Finance Act 2011.  Likewise, if a director of a company takes a large salary there are high rates of class 1 National Insurance that must be paid on a monthly basis through PAYE.

For the small business using the limited company as the chosen trading vehicle there is the temptation to try and avoid National Insurance altogether and to simply use the dividend route as the only way of withdrawing the profits from the company.  In this desire to keep tax and National Insurance to a minimum the proprietor of the business can sometimes overlook National Insurance contributions altogether and this can be detrimental to the claiming of future state pension and other National Insurance contribution contingent benefits.

The ideal situation is for all directors to take a salary which not only reflects the national minimum wage but also ensures that all entitlement to future state retirement pension is protected.

The practical tax tip is therefore that directors and shareholders must not just look to minimising the overall liability at all costs but should look at all areas of planning in the round and the National Insurance position and protection of the state pension should not be overlooked in the desire to maximise savings.

Further practical advice is for taxpayers to check their entitlement to state pension by obtaining a forecast from the Department of Work and Pensions. This way, gaps in the National Insurance record can be remedied, perhaps through the payment of voluntary class 3 contributions.


About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email; j.butler@butler-co.co.uk, Website; www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and the forthcoming Stanley: Taxation of Farmers and Landowners (LexisNexis)



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Article Published/Sorted/Amended on Scopulus 2012-02-17 15:36:29 in Tax Articles

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