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 £6396, within their tax free £12570 personal allowance, but
such salary of £6396 suffices to confer upon the recipient entitlement to the same basic state
pension and other welfare benefits to which a self employed person is
entitled. A basic rate taxpayer pays 8.75% tax on dividends exceeding the
£1000 dividend tax free
allowance within the basic rate band whereas higher rate taxpayers pay
33.75% tax on dividends exceeding the £1000 dividend tax free allowance
falling within the higher rate band above the basic rate band of £37700 (albeit this
may be able to be deferred or avoided by treating such money as a loan rather than a
dividend).
Companies pay 19%
corporation tax on annual profits at or below £50000.
Employee's NIC
at 12% commences on an annual salary above £12570.
Employer's
NIC at 13.8% commences on an annual salary above £9100 for a
director of a company and who is the only employee.
Example 1
A self employed person
with annual profits of £25000 would pay 20% basic rate income tax
on profits above their £12570 personal allowance, 9% class 4 NIC
on profits above £12570 together with £179.40 class 2 NIC -
£3784.10
income tax and NIC [20%(£25000 - £12570) + 9%(£25000 -
£12570) + £179.40].
An otherwise identical person as director and
shareholder of a company taking the maximum annual salary not subject to
employee's NIC of £12570 would pay
£478.86 employer's
NIC [13.8%(£12570 - £9100)],
£2270.69 corporation tax [19%(£25000 - £12570 - £479)] and
£759.50
income tax on dividends [8.75%(£25000 - £479 NIC -
£12570 salary - £2271
corporation tax - £1000 dividend tax free allowance)].
In this example, trading
through a company as its director and shareholder leads to an overall saving of £275.05
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.
Example 2
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 £5000 employer's NIC is exempt from payment because
of the annual £5000 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 £12570 would pay £2361.70
corporation tax [19%(£25000 - £12570)] and £793.45 income
tax on dividends [8.75%(£25000 - £12570 salary - £2362 corporation tax -
£1000 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
£628.95
The increased gain of £353.90
being the difference between
£628.95
and £275.05
from example 1 arises from, first, a £91.01 increase
in corporation tax at a rate of 19% upon the elimination of £479 employer’s NIC.
Second, the £478.86 saving in employer’s NIC. Third, the £91.01
increase in corporation tax and the £478.86 saving in employer’s NIC
result in an increase in dividends of £387.85 and which is taxable
at 8.75% - resulting in £33.95 income tax. Combining all the
foregoing 3 elements, £478.86 - £91.01 - £33.95, results in the
increased gain of £353.90.
Example 3
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 £12570 tax free personal
allowance but none of their £1000 tax free dividend allowance, £1000 tax
free dividends may be paid to the director. Such
a re-allocation of dividends would lead to a further saving of
£87.50
(8.75% x £1000) 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
£716.45.
We can obtain named companies for
£12.
Considering
our substantial experience and fees based upon our modest charge rate of
£33
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.
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