March 5th, 2021 / Insight posted in Articles

Professional Firms Insight: is your service company doing you a disservice?

A number of large professional partnerships own service companies, which employ the staff and recharge the partnership for the cost of doing so. Whilst there are often a number of very good commercial reasons for putting in place these structures, the cost of running them will get more expensive from 1 April 2023 following the Chancellor’s announcement to increase the corporation tax rate to 25%.

Profits earned by the service company, which are paid as dividends to partners, will suffer an effective rate of tax of up to 49.9% prior to 1 April 2023 when this will increase to 53.6%. If those same profits were earned in the partnership, the effective rate of tax would be 47% (based on current UK tax law at the time of writing).

We would delighted to help you weigh up whether the commercial advantages of these structures are still justified in light of these increased costs. And if not, what your options in respect of alternative structures are.