One of our duties to potential clients is to inform them of possible ways to minimize the tax they pay without compromising their benefits and we believe there are notable tax savings available by otherwise self employed persons trading through a company.
A person need only take an annual tax free salary from their
company of between £6240 and £9500, not exceeding their tax free £12500 personal allowance, pay
no income tax thereon, but be entitled to the same basic state
pension and other welfare benefits to which a self employed person is
entitled. The balance of monies from the company should be treated as dividends since a basic rate taxpayer pays 7.5% tax on dividends exceeding the
£2000 dividend tax free
allowance within the basic rate band whereas higher rate taxpayers pay
32.5% tax on dividends exceeding the £2000 dividend tax free allowance
falling within the higher rate band above the basic rate band of £37500 (albeit this can be deferred or avoided by treating such money as a loan rather than a
Companies pay 19% corporation tax on their annual profits.
Employee's NIC at 12% commences on an annual salary above £9500.
Employer's NIC at 13.8% commences on an annual salary above £8788.
A self employed person with annual profits of £25000 would pay 20% basic rate income tax on profits above their £12500 personal allowance, 9% class 4 NIC on profits above £9500 together with £158.60 class 2 NIC - £4053.60 income tax and NIC [20%(£25000 - £12500) + 9%(£25000 - £9500) + £158.60].
An otherwise identical person as director and shareholder of a company taking the maximum annual salary not subject to employee's NIC of £9500 would pay £98.26 employer's NIC [13.8%(£9500 - £8788)], £2926.38 corporation tax [19%(£25000 - £9500 - £98)] and £560.70 income tax on dividends [7.5%(£25000 - £98 NIC - £9500 salary - £2926 corporation tax - £2000 dividend tax free allowance - £3000 tax free personal allowance)].
In this example, trading through a company as its director and shareholder leads to an overall saving of £468.26 and the person is entitled to exactly the same basic state pension and other welfare entitlements to which a self employed person is entitled.
Alternatively, should an otherwise identical self employed person trade through a company as its shareholder and employee but not its director, employer's NIC is not relevant as the first £4000 employer's NIC is exempt from payment because of the annual £4000 statutory 'employment allowance' available to companies where its director is not its sole employee.
Therefore, an otherwise identical person as shareholder and employee of a company but not its director taking the maximum annual salary not subject to income tax of £12500 would pay £2735 corporation tax and employee's NIC [19%(£25000 - £12500) + 12%(£12500 - £9500)] and £609.38 income tax on dividends [7.5%(£25000 - £12500 salary - £2375 corporation tax - £2000 dividend tax free allowance)].
In this example, trading through a company as its shareholder and employee but not its director leads to an overall saving of £709.22 and the person is actually entitled to more than the basic state pension and other welfare entitlements to which a self employed person is entitled.
The increased gain of £240.96 being the difference between £709.22 and £468.26 from example 1 arises from, first, a £551.38 saving in corporation tax at a rate of 19% upon the increase in salary of £3000 less the saving of £98 employer's NIC. Second, the £98.26 saving in employer's NIC. Third, £360 employee's NIC arises at a rate of 12% upon the increase in salary of £3000. Fourth, the £551.38 saving in corporation tax and the £98.26 saving in employer's NIC both represent an increase in dividends which are taxable at a rate of 7.5% resulting in £48.68 income tax. Combining all the foregoing 4 elements, £551.38 + £98.26 - £360 - £48.68, results in the increased gain of £240.96.
Further and alternatively, an otherwise identical self employed person trades through a company as its shareholder and employee but not its director where the director is also a shareholder. Assuming the director has otherwise used their £12500 tax free personal allowance but none of their £2000 tax free dividend allowance, £2000 tax free dividends may be paid to the director. Such a re-allocation of dividends would lead to a further saving of £150 (7.5% x £2000) compared to example 2.
Therefore, in this example, trading through a company as its shareholder and employee but not its director where that director is also a shareholder leads to an overall saving of £859.22.
We can obtain named companies for £12.
Considering our substantial experience and fees based upon our modest charge rate of £25 per hour pro rata, our fees for producing the accounts of a limited company should not exceed those of producing the accounts of an equivalent unincorporated business.
HM Revenue do not investigate persons who use this tax saving route because it is above board. Indeed, in our experience, there is a lower chance of being investigated by HM Revenue by incorporating rather than remaining self employed - no client who has incorporated since the tax advantages of incorporating began in 2000 has been the subject of any tax investigation or enquiry.