Alan Pink looks at the potential impact of allowing reserves to build up in limited companies.
Many businesses are sitting on a kind of ticking time bomb in relation to tax. This is in the situation where profit and loss reserves build up because they are not being regularly cleared out by way of dividends paid to the shareholders.
The reason this is such a big issue is basically because of the big difference between the tax rates that apply to profits that are distributed from a company on the one hand, and the profits that are kept within the company on the other.
Even with the changes promised us from 2023, the top rate of corporation tax will be 25%, with profits of less than £250,000 being taxed at rates down to a minimum of 19%. So, it seems to make obvious sense to run a business activity through a limited company, when you compare the rates