Recent tax changes: limited company or partnership?

By Graham | February 8, 2023

In light of recent tax changes (Autumn 2022), it might be worth considering whether a partnership or company is now the most tax-efficient way to operate your business from the start of 2023/24 (6th April 2023).

Don’t forget the big picture: tax on profits is only one consideration. Limited liability, other taxes such as Inheritance Tax, Capital Gains Tax, and business succession plans should all be taken into account.

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Changes to Corporation Tax and Dividends

In 2022/23 (until 5th April 2024) companies of all sizes pay 19% Corporation Tax on all their profits. All change from 6th April 2023 (start of 2023/24), when the rate of tax will depend on the level of profit and whether you own any other companies. For a company owner with no other associated companies, the position will be as follows:

The first £50,000 of profit is taxed at 19%
The next £200,000 of profit is taxed at a marginal rate of 26.5%.
Any balance over £250,000 is taxed at 25%.

For a company with profits of £100,000, the changes increase the Corporation Tax bill by £3,750. However, this is still less than 40% Income Tax paid by a higher rate taxpayer if the business was operated as a partnership.

The deciding factor could be how much needs to be extracted from the business to cover living expenses or service personal loans and mortgages. Companies pay Corporation Tax on their profits and the shareholders pay additional tax on their dividends. Until now, it has been more tax-efficient to withdraw funds by way of dividends, but the tax payable on dividends increased by 1.25% in April 2022, with the new rates 8.75% for a basic rate taxpayer, 33.75% for a higher rate taxpayer, and 39.35% for an additional rate taxpayer.

Taking all these changes together, if a company is paying 25% or 26.5% Corporation Tax on part of its profits, and the balance is withdrawn as a dividend by a higher or additional rate taxpayer, the effective rate of tax will be more than 50%. This could be more than the tax paid by the same individual on the equivalent partnership profits. Don’t forget self-employed people also pay National Insurance on profits, but it is 9% maximum, and drops to 2% on profits over £50,270. And self-employed National insurance is not payable once a person reaches State Pension age.

Should I now operate as a partnership or company?

This does not mean that a limited company is no longer the right option. It depends where your business is in the lifecycle: if you are expanding your business and not withdrawing all the profits, Corporation Tax at 25% or 26.5% is preferable to Income Tax and National Insurance of 42%. But if you are extracting all profits, a Partnership could now reduce your overall tax costs.

Some partnerships can also have limited liability, for example, Limited Liability Partnerships (LLP) are a hybrid between a limited company and a traditional partnership. LLPs have Companies House filing obligations, but they are taxed like traditional partnerships, not as limited companies.

As always it is essential to take professional advice that takes account of your personal circumstances as no one answer applies to all businesses.