December 13th, 2016 / Insight posted in The Sunday Times Business Doctor

Business Doctor: We reinvest profits but our tax is rising

TP writes: My business partner and I operate a traditional partnership but a lot of our profits are reinvested. We have noticed our personal tax liabilities are rising but we are not taking out anywhere near that level of income. Is there any way to defer our income tax to recognise the reinvestment?

To align your tax liabilities to the income you take, you could incorporate the partnership by transferring the trade and assets into a new limited company, writes Jamie Sherman, partner at Kingston Smith LLP. You could claim incorporation relief, so there would be no capital gains tax on the deemed sale of the business to the company.

Income tax and national insurance contributions are currently being paid at rates of up to 47% on profits generated by the partnership, regardless of what you withdraw. Through a limited company, corporation tax would be paid on profits generated while income tax would be paid only on any amounts withdrawn by you as salaries or dividends. Corporation tax is now 20% but will fall to 19% in and drop to April 17% by 2020.

Another advantage of trading through a company is limited liability status. This offers greater protection in the event of any claim against the business.

When incorporating, there are additional administrative tasks such as the requirement to file annual accounts with Companies House. There are also practical implications, such as setting up a company bank account, updating your business name and informing customers and suppliers.