Tx notes fa22 Final

June 2023 to March 2024 exams
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3. Operating a business as an unincorporated trade or as a 
company (incorporated) 
When an individual chooses to start their own business they have a choice of business structure 
decision to make, choosing between operating the business as an unincorporated trade, a sole 
trader or a partnership or an incorporated trade as a company. this decision will have important tax 
consequences.
If a business is run as an unincorporated trade then the owner of the business will be assessed to 
income tax on the tax adjusted trading profit of the business NOT the amount of cash (drawings) 
they have chosen to take from that business. These tax rates being 20%, 40% and 45% depending 
on the level of profit. The profit will also be assessed to class 4 NIC. Small Class 2 NIC payments will 
also be payable.
Tax will be collected through the self assessment system.
If the business is run as a company then the adjusted trading profit of the company will be subject to 
a single rate of corporation tax, currently 19%, whatever the level of profit. The individual will then 
only be chargeable to tax on what they take out of the company and profits are usually extracted as 
either salaries or dividends.
If owners pay themselves a salary then the cost of the salary (including employers’ class 1 NIC) will 
be an allowable deduction to the company in computing its TTP chargeable to corporation tax. A 
dividend paid by a company however, is a distribution out of the taxed profits of the company and 
therefore achieves no corporate tax saving.
For the owner manager of the company any salary payments must be made through the PAYE 
system with both income tax and employee’s class 1 NIC being deducted at source and paid over to 
HMRC. Dividends will be subject to their own income tax rates with tax being payable through the 
self assessment system above the dividend income nil rate band.
We may have to consider therefore the tax implications of a taxpayer choosing to incorporate their 
business and run it as a company rather than an unincorporated trade and the subsequent decision 
for an owner manager of a company as to whether to extract the profits of a company as either a 
salary or dividend payment.

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