# Taxation of the unincorporated business for ATX-UK

Part 2 of 4

This is the Finance Act 2023 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2024 to 31 March 2025. Candidates sitting ATX-UK after 31 March 2025 should refer to the Finance Act 2024 version of this article (to be published on the ACCA website in 2025).

In the first part of this article we looked at some fundamental issues relating to unincorporated businesses.

The remaining parts of this article compare the total tax paid on the profits of a business depending on the business vehicle used and the cessation of a business.

#### Total tax – comparison with company

The total tax paid on the profits generated by a business will depend on whether the business is unincorporated or is owned by a company. This is a significant issue and will be considered, together with legal and commercial issues, when deciding on a business vehicle prior to commencing to trade and also when considering the desirability of transferring an existing unincorporated business to a company.

The calculations necessary to compare the alternative business structures must be performed with care if they are to be accurate. They require a sound knowledge of income tax, national insurance and corporation tax.

Illustration 1

Sammy’s business has an annual tax adjusted profit of £52,000. This figure is prior to any payments being made to Sammy. Sammy is considering three strategies: Strategy A, where the business is unincorporated, and Strategies B and C, where the business is incorporated.

Under Strategy A, where the business is unincorporated, the net income available to Sammy for the year ended 31 March 2024 is calculated as follows.

Strategy A
Unincorporated
£

Income tax:

52,000

Personal allowance

(12,570)

Taxable income

39,430

£37,700 x 20%7,540

(£39,430 – £37,700) x 40%

692

Income tax payable

8,232

Class 4 national insurance contributions:

(£50,270 – £12,570) x 9%

3,393

(£52,000 – £50,270) x 2%

34

Class 2 national insurance contributions:

52 x £3.45

179

Total tax payable

11,838

Net income for Sammy
(£52,000 – £11,838)

40,162

Under Strategies B and C, the business will be operated via Wilson Ltd, a company owned 100% by Sammy. Sammy will be the only employee of Wilson Ltd, such that the national insurance contributions employment allowance will not be available. Sammy will not receive any dividends other than those received from Wilson Ltd.

In these circumstances, the net income available to Sammy will depend on the mix of salary and dividends paid by the company. The calculations set out below show the income available to Sammy where the company’s profit after tax is paid to Sammy as a dividend in addition to a salary of either £37,000 or £16,000.

Strategy B
Salary
£37,000
£
Strategy C
Salary
£16,000
£

Wilson Ltd

52,000

52,000

Salary

(37,000)

(16,000)

Employer’s class 1 national insurance contributions

((£37,000 – £9,100) x 13.8%)

((£16,000 – £9,100) x 13.8%)

(3,850)

(952)

Taxable total profit

11,150

35,048

Corporation tax at 19%

(2,119)

(6,659)

Available for dividend

9,031

28,389

Sammy

Employment income

37,000

16,000

Dividend income

9,031

28,389

Personal allowance

(12,570)

(12,570)

Taxable income

33,461

31,819

((£37,000 – £12,570) =
£24,430 x 20%)

4,886

(1,000 x 0%)

0

(£8.031 x 8.75%)703

5,589

((£16,000 – £12,570) =
£3,430 x 20%)

686
(£1,000 x 0%) 0
(£27,389 x 8.75%) 2,397
3,083

Salary

37,000

16,000

Dividend

9,031

28,389

Income tax

(5,589)

(3,083)

Employee’s class 1 national insurance contributions
(£37,000/£16,000 – £12,570) x 12%

(2,932)

(412)

Net income for Sammy

37,510

40,894

Summary – Net income for Sammy

Strategy A
Unincorporated
£
Strategy B
Salary
£37,000
£
Strategy C
Salary
£16,000
£

Net income for Sammy

40,162

37,510

40,894

The net income available to Sammy is, of course, simply the difference between the profit of the business and the total tax payable under each of the alternatives.

Strategy A
Unincorporated
£
Strategy B
Salary
£37,000
£
Strategy C
Salary
£16,000
£

52,000

52,000

52,000

Corporation tax

(2,119)

(6,659)

Income tax

(8,232)

(5,589)

(3,083)

National insurance contributions:

Employer’s class 1

(3,850)

(952)

Employee’s class 1

(2,932)

(412)

Class 2

(179)

Class 4
(£3,393 + £34)

(3,427)

______

______

Net income available
to Sammy

40,162

37,510

40,894

A comparison of Strategy A with Strategies B and C illustrates that being self-employed does not necessarily result in more income being available to the individual.

A comparison of Strategy B with Strategy C illustrates the tax that can be saved when a dividend is paid in place of salary.

#### Conclusion

Calculating the total tax paid on the profits of a business is not particularly technically difficult. However, it does require very good knowledge of the ATX-UK syllabus and great care must be taken in order to earn all of the available marks.

Note: The unincorporated business is also considered in:

• Taxation of the unincorporated business – the new business for ATX-UK

Written by a member of the ATX-UK examining team

The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.