Is it worthwhile using a company if you want to extract all the profits?

Given the changes to the rate of income tax and corporation tax it's worthwhile considering whether it's still worthwhile using a company -- especially if you are looking to extract all of the profits. In the past small companies benefited from much lower rates of tax than if the owners had simply traded as a sole trader or partnership. The 0% rate of corporation tax for the first £10,000 of profits is a good example of this. Now though the rates of corporation tax facing small companies will exceed the basic rate tax band. After April 2009 such companies will face a 21% rate of tax, with the basic rate of income tax being reduced to 20%. Of course if the profits exceed the higher rate band of income tax (around £44K including the personal allowance) using a company is still beneficial as you'd still be likely to be taxed at 21% in the company whereas as an individual you'd be taxed at 40%. After April 2010 the highest earners will pay income tax at 50% and therefore using a company can ensure an even greater saving. Even if the profits were very large the company option still looks attractive, in fact even more so now, as the main rate of corporation tax is reduced to 28% - which also compares favourably with the highest 50% rate of income tax. So when you look at the rate of tax on profits using a company still retains it's low tax advantage. However this assumes that the profits are all retained in the business. What if all of the profits are extracted from the business? In this case you'd then need to look at the impact of income tax as well. Most company owners would extract cash as dividends. In this case, they'll be subject to 0% income tax within the basic rate band and 25% above this. The highest earners after April would suffer a dividend tax rate at an effective 36.11%. If a company has low profits within the basic rate income tax band, it would be subject to 21% corporation tax as a company, but only 20% as an individual. However an individual would incur national insurance at 8% whereas dividends could be extracted from the company free of income tax and national insurance. Therefore as a general rule if the profits are low using a company would still be advantageous. As the profits rise (above the income tax higher rate band but below the £300,000 marginal rate of corporation tax band), the company would still be subject to 21% corporation tax, but income tax would be at 40% or 50% on some of the income. Profits after corporation tax would be extracted with a 25% income tax charge up to the £150,000 50% tax band. The only way to ascertain what is beneficial is to run through the figures for a couple of profit levels.