Tax planning for the business owner should be based on a comprehensive approach to both business and personal taxation. Take professional advice to find out how best to achieve your personal and business financial goals and minimise taxes at the same time.
Your choice of legal structure can have a significant impact on likely tax bills. If you set up in business as a sole trader or in a traditional partnership, you will be self-employed – and therefore liable for income tax on your profits. So your tax planning should focus on income tax planning, along with other personal tax planning issues, such as minimising any eventual inheritance tax.
By contrast, a limited company will require corporation tax planning as well as income tax planning. The effect in terms of overall tax (and National Insurance) liabilities depends on a range of factors, including the level of business profits and how much income you need to take from the business.
Of course, tax planning is not the only issue. You may want to take advice on other issues, such as the significance of limited liability protection if you form a company. Income tax planning for company owners needs to take into account the most tax-efficient way to take income. For example, dividends are not liable for National Insurance contributions (whereas income taken as salary is). Both company owners and the self-employed should also consider the tax planning opportunities offered by tax relief on pension contributions.