With changes to tax rates on the horizon, we thought we’d put together a quick comparison and guide to income tax versus corporation tax. 

Is it cheaper for your tax bill to go solo as a property investor and pay income tax on your profits, or to incorporate and pay corporation tax instead? Let’s find out…

Personal allowance explained

Let’s start with your tax-free ‘personal allowance’. Most people won’t pay any tax on the first £12,570 they earn each year. 

However, if your ‘adjusted net income’ (the total taxable income minus any gross pension contributions) is £100,000 or more each year, the personal allowance reduces by £1 for every £2 that you’re above the threshold.

This means, if your income is £125,140 or more, you won’t have access to any personal allowance.

Income tax rates 2021/2022 and beyond

Income tax is charged at marginal rates, which means you pay different rates of tax on each portion of your income above a certain threshold.

If you do earn less than £100,000 each year (and therefore qualify for the full personal allowance amount), here are the rates of tax you’ll pay:

• The ‘basic rate’ of income tax charges you 20% on income from £12,571 to £50,270.
• The ‘higher rate’ of income tax charges you 40% on income from £50,271 to £150,000.
• The ‘additional rate’ of income tax is charged at 45% on any income above £150,000.

Let’s provide a few examples to show how it works.

Example 1

An experienced solo property investor earns £90,000 in pre-tax profits over the year. 

Their tax bill would look like this:

• 0% tax on the first £12,570
• 20% tax on the next £37,700 (which is £7,540)
• 40% tax on the remaining £39,730 (which is £15,892)
• None of their income would reach into the 45% bracket

Their total tax bill (£7,540 + £15,892) would be £23,432.

Example 2

A first time property investor makes £18,000 in pre-tax profits over the year.

Here’s what their tax bill would look like:

• 0% tax on the first £12,570
• 20% tax on the remaining £5,430 (which is £1,086)
• None of their income would reach into the 40% and 45% brackets

Their total tax bill for the year would be just £1,086.

Corporation tax rates 2021/2022 and beyond

Income tax can be a lot to get your head around. If you set up your property investment activities as a business entity, corporation tax is currently far more simple; but that may be set to change.

Right now, instead of multiple marginal rates, limited companies currently pay 19% tax. This flat rate stays the same no matter how much you make in profits.

However, from April 2023, the government will be effectively splitting this single tax rate into two separate rates. 

Companies who earn £50,000 or less each year will still pay 19% – referred to as the ‘small profits rate’ – while companies who earn more will pay 25%. 

If your business makes between £50,001 and £250,000, you might be able to claim marginal relief, which can reduce your final tax bill slightly. (Your accountant will be able to tell you how much marginal relief your company might be able to claim.)

Not ideal, but 25% is still a much better deal for higher-rate and additional-rate income tax payers.

Again, let’s illustrate with a few examples:

Example 3

A young property investment company makes £45,000 in pre-tax profits in their first year from April 2023 to April 2024.

Their tax bill would be 19% of £45,000, which is £8,550.

Example 4

An experienced large-scale property investment company makes £300,000 in pre-tax profits from April 2023 to April 2024.

Their tax bill would be 25% of £300,000, which is £75,000.

What about tax on income from your business?

You might be wondering if your business profits after corporation tax will take a second hit from income tax once it’s in your personal bank account

The answer? It depends on how you extract the profits.

For money paid to yourself (or to anyone else) via a salary, you only pay income tax through the PAYE system; since salaries are a deductible expense and won’t affect the amount of corporation tax your company pays.

As for dividends, every individual gets a yearly dividend allowance. This is in addition to the personal allowance you also get under income tax rules.

For 2021 to 2022, the dividend allowance is £2,000. Any dividends above this allowance will be charged tax at the following rates depending on the income tax brackets we covered earlier:

• You won’t pay any tax on dividends if your total income for the year stays within your £12,570 personal allowance (even if your dividend income is higher than the £2,000 dividend allowance)
• If you’re in the 20% ‘basic rate’ bracket, you’ll pay 7.5% on dividends from April 2021 to 2022. This dividend rate goes up to 8.75% from April 2022 onwards.
• If you’re in the 40% ‘higher rate’ bracket, you’ll pay 32.5% on dividends from April 2021 to 2022. Again, this rate goes up to 33.75% from April 2022 onwards.
• If you’re in the 45% ‘additional rate’ bracket, you’ll pay 38.1% on dividends from April 2021 to 2022; going up to 39.35% from April 2022 onwards

It’s important to note, though, that you don’t have to extract the profits if you prefer; you can simply keep them within the company. 

These are known as retained profits; and once you’ve paid the corporation tax on them in the year they were earned, they can be kept within the company without being taxed further.

Example 5

Let’s go back to that young property investment company that made £45,000 in pre-tax profits from April 2023 to April 2024.

As we’ve already discussed, the company’s own tax bill would be £8,550 – but what about the company director?

They draw a salary from the business of £8,000 and a dividend of £8,000. They also bring in additional personal income of £10,000 which isn’t related to property investment.

In this case, their tax bill would look like this:

• No tax on the first £12,570 via the director’s personal allowance; leaving £13,430 still to be taxed
• The £5,430 income would be subject to income tax at 20% (which is £1,086)
• The remaining £8,000 is the dividend; with no tax on the first £2,000 and 8.75% dividend tax on the remaining £6,000 (which is £525)

So, the director’s own tax bill (£1,086 + £525) would be £1,611.

Need more help with your property investment taxes? As specialist accountants for corporation tax in Uxbridge, the team at GNS Associates can help you get to grips with your tax bill; and can even help you with adopting tax planning strategies for reducing your tax liability. 

Call us on 0208 090 2604 or email info@gnsassociates.co.uk to arrange your consultation today.