There
are are either no tax savings or, alternatively, no worthwhile tax savings available by otherwise self employed persons trading
through a company.
A basic rate taxpayer pays 8.75% tax on dividends exceeding the
£500 dividend tax free
allowance within the basic rate band of £37700.
Companies pay 19%
corporation tax on annual profits at or below £50000.
Employee's NIC at
8%
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 and 6% class 4 NIC
on profits above £12570 -
£3231.80
income tax and NIC [26%(£25000 - £12570)].
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
£803.25
income tax on dividends [8.75%(£25000 - £479 NIC - £12570
salary - £2271 corporation tax - £500 dividend tax free allowance)].
In this example, trading through a company as its director and
shareholder leads to an overall cost of £321.
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 £837.20 income tax on
dividends [8.75%(£25000 - £12570 salary - £2362 corporation tax -
£500 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
£32.90 .
The difference of £353.90 between
£32.90
and -£321
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
difference 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 £500 tax free dividend
allowance, £500 tax
free dividends may be paid to the director. Such
a re-allocation of dividends would lead to a further saving of
£43.75
(8.75% x £500) 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
£76.65 .
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