October 29th, 2012 / Insight posted in

A partnership could cut tax

PJ writes: I own a limited company but am now considering a new venture. I don’t know whether to set it up as a company or a limited liability partnership to keep my tax to a minimum.

Your decision could affect the taxation of your existing company as well as your new business, writes Jon Sutcliffe, partner at Kingston Smith LLP. If you control more than one limited company, this will reduce the small-company limits for corporation tax and could increase the rate at which profits in your existing company are taxed – potentially from 21% to towards 28% this year. Thus, a new company could greatly increase your overall business and personal tax bills.

Profits arising in a limited liability partnership (LLP) would not affect the existing company’s corporation tax. They are taxed on the LLP’s members as self-employed income. As a higher-rate taxpayer, you will be liable to income tax at 40% and Class II and IV National Insurance. Taxes are paid under the self-assessment system in January and July each year. For 2009-10 onwards, an LLP will very often, but not always, be more tax efficient than salaries or dividends from a company.

Salaries are generally the most expensive for tax purposes because of the employer’s National Insurance bill, which at present is 12.8%, and the combined company and personal tax on dividends make them less tax efficient than they used to be.

If you are concerned about having cash set aside to meet future tax liabilities, this will be an issue for both the LLP and dividends, but not for salary. An alternative to setting funds aside in a personal bank account might be to set funds aside in the company or LLP when you draw dividends or as profits are earned.

The best solution for you will depend on your circumstances and the profits and cash requirements of the businesses. A further consideration is whether the new business will make a loss in its early years; in that case the LLP route can allow some personal tax relief against your other income.