It is possible to reduce your (UK) personal tax and national insurance by running your business via a limited company. The amount you can save will depend upon several factors:
* The company’s profitability
* Your personal circumstances
* The amount of funds you need to withdraw from the business
Why tax and National Insurance savings are possible
Sole traders (and partners in a partnership) are currently taxed on their profits whether or not they withdraw them from the business. Depending upon their profitability and other income they could be paying tax and national insurance at a combined rate of 41%.
Companies pay National Insurance on wages at 12.8% (over £5,435 pa) and if the director is paid a low salary (between £5,435 and £6,035) and no benefits in kind, then the company will have a very small company National Insurance charge. This level of salary uses the director’s personal allowances so the company receives a tax deduction for the salary and the director pays no tax (assuming no other earned income).
Dividends
Dividends can only be paid out of the company’s after tax profits i.e. for the year to 31 March 2009 a maximum of 79% of the pre-tax profit, otherwise they will be illegal under Company Law and HM Revenue & Customs may treat them as loans/salary with adverse tax consequences.
Other things to consider.
There are many other issues to be considered when choosing whether to trade as a sole trader or limited company, including legal and commercial, as well as the additional administrative requirements.
To find out more feel free to visit our website.
Save (UK) tax and national insurance with your limited company - To learn more about this author, visit Keith Silman's Website.
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Keith Silman
(Visit Keith's Website)
I am Managing Director of HRBS Limited, a
firm of pro-active, fixed fee accountants
based in South Yorkshire, England.
I qualified as a Chartered Accountant with
international firm Arthur Andersen and
have over 20 years experience as an
accountant and tax advisor, Business
Consultant, Finance/IT director, Small
Business Advisor/Mentor and Quickbooks
trainer.
I am a highly experienced Quickbooks
authorised Professional Advisor having
designed and implemented Quickbooks
systems for over 13 years.
My mission at HRBS is to provide high
quality, pro-active and hands-on
accountancy and business services to
individuals, partnerships, small and micro
businesses. I believe that small and micro
businesses deserve high quality, hands-on,
knowledgable business support and we have
built a solid reputation by providing a
professional and cost effective service to
our clients.
Find out more by visiting our website at
HRBS.biz.
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