40% tax payer with own business ..how to be more tax efficient

building

my dad is a tax payer at 40% on his business. I believe that there is a more tax efficient way of doing this which is maybe to set up a limited company - though i do understand that this complicated the paperwork too with audited accounts and this can cost more too - and pay oneself dividends. can anyone help? my dad only ever believes me too when i have others backing up what i say!!!
any help appreciated. thanks in advance.

nlpnlp

There are some potential benefits in trading via a limited liability company as opposed to trading as a self employed individual. The top tax rate on dividends is 32.5%, capital gains tax on shares qualifying for Business Asset Taper Relief can be as low as 10%. However, there are disadvantages, higher National Insurance and additional administration.

There are some complex things that may apply IR35 and Settlements legislation to mention just two. There are different routes to incorporate, which will be determined by personal circumstances.

As things currently stand, it is probably fair to say that it is possible to lower your overall tax liability by using a company. It is something that is worth looking at. Your father will need to take tax advice from a professional tax advisor so that he understands the negatives as well as the positives (lower tax bill). The process of incorporation also needs to be correctly carried out, which a professional tax advisor will be able to do. You should be able to get a decent local firm/advisor to run projections of the potential tax savings available and also advise on the additional demands, for a few hunderd pounds. Money that will be well spent.

nookie

From a tax perspective, the general rule of thumb is if the business is loss making then remain sole trader (loss relief is more effective).

When the business makes a taxable profit incorporation is the recommended route. The new NCDs rule (non corporate distributions) may put a dampner on the payment of divindends, but remember the effective rate on dividends is 0% or 25% depending on tax status.