The new 50% income tax rate came into effect on 6 April 2010 on taxable income above £150,000.
The personal allowance was also clawed back for people whose income exceeds £100,000. The amount of the allowance was reduced by £1 for every £2 above the £100,000 limit, until the Personal Allowance is reduced to nil.
Some tax planning may save you tax when setting up.
We have done some calculations below which we have summarized for the new income tax rate coming into effect for 2011/2012 tax period.
We have assumed the following:
A personal allowance/Salary of £7,475* which will be reduced to nil when profits exceed £114,950. National Insurance threshold £7,225. Basic Tax allowance £35,000 (20%), up to £150,000 (40%) over £150,000 (50%).
| Annual Profits | |||||
| Sole Trader | £15,000 | £30,000 | £50,000 | £100,000 | £110,000 |
| National Insurance | |||||
| Class 2 | £130 | £130 | £130 | £130 | £130 |
| Class 4 | £700 | £2,050 | £3,323 | £4,323 | £4,523 |
| Income Tax | |||||
| 20% | £1,505 | £4,505 | £7,000 | £7,000 | £7,000 |
| 40% | NIL | NIL | £3,010 | £23,010 | £29,010 |
| 50% | NIL | NIL | NIL | NIL | NIL |
| Total | £2,335 | £6,685 | £13,463 | £34,463 | £40,663 |
| Annual Profits | |||||
| Company | £15,000 | £30,000 | £50,000 | £100,000 | £110,000 |
| Salary | £7,225 | £7,225 | £7,225 | £7,225 | £7,225 |
| Corporation Tax | |||||
| 20% | £1,555 | £4,555 | £8,555 | £18,555 | £20,555 |
| Divided | £0 | £0 | £622 | £10,622 | £12,615 |
| Total | £1,555 | £4,555 | £9,177 | £29,177 | £33,170 |
Notes:
There are also other tax factors to take into account, seek professional advice before you make your decision.
In the above comparison it is assumed company profits are extracted first by a salary of £7,225, with the remainder drawn as dividends. It is also assumed in both mediums that the proprietor receives no other taxable income and that there are no associated companies.