The Ultimate Onshore Tax Efficient Trading Structure

Following the tax rises over the last couple of years which culminated in a 50% top rate of tax, with increases in the rates of National Insurance and reduction in the basic rate band, you may be thinking that the options available to be tax-efficient whilst having the ease of remaining onshore have reduced.

Since April 2001, the option of running your business activities through a Limited Liability Partnership (LLP) has been available to all businesses, not just traders. This was a result of lobbying by large professional practices of accountants, solicitors and lawyers wanting to avoid the demons associated with traditional partnerships, mainly the threat of "joint and several" liability for actions performed by other partners. Therefore in contrast to a traditional partnership, the legal protection available through an LLP is very similar to that of a limited company, though on a much more flexible basis and is available for use in all industries.

From a tax point of view, the LLP is transparent so that the LLP itself faces no tax bill on its profits, although the partners (officially known as "Members") face tax bills on their share of any profits or gains that they receive from the LLP. In this respect, an LLP is effectively the same as any other partnership.

However, whilst an LLP would give individuals the flexibility of self-employment with the advantage of limited liability, it would also give the Members a similar tax liability to other forms of self-employment. So where do the savings come from, particularly if you consider that once your profits are, as a rule of thumb, more than around £20,000 per annum it is generally more tax efficient to trade through a limited company?

The key is to make one of the members of the LLP a limited company. Provided that there is a commercial reason for doing so, this could allow you to have most of your profits taxed in a limited company using the lower Corporation Tax rates.

"Why not just have a Limited Company then?" I hear you ask. The LLP with a corporate partner structure allows further tax efficiencies which can allow the individual to benefit from legally avoiding higher rate tax on any drawings by drawing against capital rather than income, as well as allowing the individual to build an investment portfolio in a very tax-efficient manner with much greater flexibility than a pension fund.

For example, a trader making profits of £150,000 per annum, but drawing only £80,000 for living costs would pay around £58,500 in tax if self-employed, around £38,900 if using a limited company, but possibly as low as c£28,600 if using a hybrid partnership structure.

Why not find out more by contacting a member of our team on 01474 853856.

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