SMEs at risk of wasting £4.2 billion by not considering change of business structure
New research from unbiased.co.uk reveals that SMEs could be at risk of wasting £4.2 billion in unnecessary National Insurance payments on their profits by not considering changing their business model to that of an incorporated business.
Unbiased.co.uk’s Tax Action Report looked at the overall amount of tax wasted by SMEs by not making use of tax breaks and tax efficient ways of running a business, highlighting an overall tax wastage by SMEs in the UK of £7.1 billion.
The report found that there are currently 246,000 partnerships and one million sole traders that could be saving £4.2 billion in National Insurance contributions on their profits by incorporating their businesses, making it the largest area of tax wastage for SMEs.
Owners of unincorporated small businesses are self-employed and when their earnings reach a certain threshold they need to pay National Insurance contributions as a percentage of the business’s annual taxable profits. These National Insurance contributions could be avoided by incorporating the business and taking a small salary up to the threshold at which National Insurance is payable, then taking the balance of post-tax profits as dividends, which are taxed at a lower rate.
Karen Barrett, chief executive of unbiased.co.uk commented: “Tax is a vast and complex subject and business owners often simply do not have the time to understand how to optimise their tax status whilst also running their business day to day. Our Small Business Tax Action Report reveals that by not considering incorporation, small businesses could be missing out on huge national insurance savings. Whilst this option will not suit all businesses, it can be an effective way to save money and it’s well worth considering by businesses that meet the criteria.
“A professional adviser can help you to understand your business’s tax liabilities, make sure you are using any tax breaks available to you and assist you in keeping up to speed on the impact of potential changes to current tax rules for you and your business. They can also free up your time, allowing you to focus on what you do best – running your business.
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