What structure should I use for trading?
If you are UK based and trading in any of the financial markets, you have effectively three options of vehicles through which you may run your trading activities.
If you are self employed in UK working on your own, from a legal point of view, you and the business are effectively one and the same. Therefore, any losses that are incurred are your own losses and you may end up losing your own personal assets.
However, on the flip side, any profits are truly your own profits and not owned by any corporate vehicle between you and the actual trade.
From a tax point of view, you are liable to both Income Tax and National Insurance on any profits that you may earn, or if in a partnership, the share of the profits that are attributable to you.
In both the 2009/2010 and 2010/11 tax years, this means that the first £6,475 is Income Tax free and the next £37,400 is taxed at 20%. Any additional profits over and above this is then taxed at 40%, with a new 50% tax rate hitting in 2010/11 where profits exceed £150,000.
Class 4 National Insurance meanwhile has slightly different bandings just to confuse the issue. The first £5,715 is National Insurance free, and the next £38,160 is then subject to 8% NI before falling to a rate of 1% for any profits over and above this.
Therefore if your profits exceed £43,875 you will find that your tax bill above this amount is effectively 41% (or possibly 51% from 6th April 2010 if your profits exceed £150,000!).
In addition to this , self-employed individuals making profits of more than £5,715 are also liable to another form of National Insurance called Class 2 National Insurance. This is a flat rate of £2.40 per week and is usually paid by a direct debit on a monthly basis.
The payment of tax through self assessment (Income Tax and Class 4 National Insurance) is payable at the end of January following the tax year with payments on account payable in advance of the following tax year (but based on the last year) due also at the end of January and end of July.
Generally speaking, remaining purely self-employed is the most straight-forward option for traders, although once profits exceed approximately £20,000, it is often found that a corporate vehicle such as a limited company or hybrid LLP becomes less expensive overall. In addition, you should consider whether you wish to risk losing your own personal assets outside of the business.
A limited company is a separate legal entity to the owners (shareholders) of the company, and thus the owners (who are often also the company directors – the individuals running the business) enjoy limited liability in the event of the business going bust, meaning that they would only lose the money/assets that they have invested in the company itself, except in exceptional circumstances such as fraud.
If a limited company is used to trade through, all profits/losses are made by the limited company and they are subject to Corporation Tax, at the following rates in both the 2009/10 and 2010/11 tax years:
- First £300,000 taxed at 21%
- Next £1,200,000 taxed at 29.75%
- Remainder taxed at 28%
although the above rates may be adversely affected where you or a member of your close family runs another limited company.
However, you may also face a tax liability personally based on how you are withdrawing your income from the limited company.
Generally speaking, the optimal method for a director/shareholder to withdraw money from their own limited company is by way of a small salary of up to £5,720 per tax year together with dividends, although again this depends on the individual’s circumstances.
Drawings (including the salary) above approximately £40,000 will result in additional higher rate tax being payable by the individual. Should any amount be taken additionally as a dividend then tax of approximately 25% of the excess will be payable through the self-assessment system in the same way as the self-employed individual shown above. For example, if £50,000 was drawn by way of a salary of £5,700 and net dividends of £44,300, the resultant tax liability would be approximately £2,500 (excluding any payments of account for the following year).
As compared to a self-employment based structure, Limited Companies remain generally more tax-efficient particularly where profits (and drawings) do not exceed £300,000. However, as profits (and drawings) increase above this level, self-employment structures again become slightly more tax-efficient, although you would again face unlimited liability in the event of losses being made.
Hybrid Limited Liability Partnerships
A Limited Liability Partnership is effectively a combination of the self-employment and limited company options which utilises limited liability (like a limited company) and the tax structure of a self-employed person and/or the limited company.
In the UK, Limited Liability Partnerships do not face their own tax bills and thus they have effectively a 'flow-through' structure for tax so that the members of the LLP are taxed on their own share of the partnership profits. If the members are individuals, they are assessed as self-employed individuals, whilst if the members are limited companies, they are assessed under Corporation Tax rules.
Given that members of LLP's may be individuals or limited companies (or indeed some forms of trusts or overseas entities) there is a great deal more flexibility in LLP structures, particularly where the members are a mixture of both individuals and limited companies, which is what we refer to as "hybrid LLP's"
Due to this inherent flexibility, LLP's can provide an extremely tax-efficient method of drawing money from a trading vehicle, or even making tax-efficient investments.
In order to find out more about "hybrid LLP's" or the best option for your trading activities, please check our Free Consultation page to book your place on one of our forthcoming "Tax Planning for Proprietary Traders" seminars, or email email@example.com to arrange to discuss your own circumstances with one of our specialists.
Please note that figures stated within this article presume that the only form of income is that from the trading activities and personal circumstances may differ from the examples shown.
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