Limited Company - Tax Efficiency

[ny_rk]

Hi,

I'm thinking about becoming self employed. I'm looking to offer consultancy services. Is setting up a limited company the most tax efficient way of paying myself?

Any thoughts appreciated.

Thanks

[section 44]

Is setting up a limited company the most tax efficient way of paying myself?

No.

It would depend on quantum of the profit and the extent to which you would need to realise the profit (extract from the company).

[ny_rk]

Revenue will be at least 500K and I'm not looking to take much salary if deferring is more tax efficient

[dale38]

If I could try to give this subject a lift by giving my own circumstances as an example. I'm considering becoming a ltd company in order to save money on tax. I'm clueless compared to most members on this site and what I believe to be the case is probably way of the mark.

I went self employed for the 2010/11 year so I'm filing my returns by the 31st Jan. I earn 60k per year with commission only as a sales rep. I run my own car and claim £12k tax relief by travelling 40k miles, I have a rented house so will claim around 20% of my rent as an office giving me a further £2k relief. I will pay around £7k tax at 20% and £2k tax at 40% plus around £3k NI contribution ( plus half again in advance for the 2011/12 year ).

If I become a limited company I believe this would save me money. If I could give the example.
Turnover 60k
Pay myself 15k salary and pay my tax/ NI on this as usual ( around £1700 )
All expenses should total £10k ( £6500 diesel, services, etc )
This should leave £35k profit ( payed as dividends ) thats taxed at 20% giving me a tax bill of £7k. Add the salary tax and this works out paying around £9k instead of £12k by not being a limited company.

Am I right? Please tell me what I'm missing. If you know of a site/ URL that gives me chapter and verse on this I would appreciate it.

Regards

Dale38

[mullet]

Please tell me what I'm missing

That the dividends will take you into the higher tax rate?

[dale38]

Aren't the dividends tax free?

[mullet]

If you pay tax at the basic rate
You have no tax to pay on your dividend income because the tax liability is 10 per cent - the same amount as the tax credit - as shown in the earlier tables.

If you pay tax at the higher rate
You pay a total of 32.5 per cent tax on dividend income inclusive of tax credit where this falls above the basic rate Income Tax limit (£35,000 for the 2011-12 tax year). In practice, however, you owe only 25 per cent of the dividend paid to you after the tax credit has been taken into account.

If you pay tax at the additional rate
From the 2010-11 tax year you pay a total of 42.5 per cent tax on dividend income that exceeds the higher rate Income Tax limit (currently £150,000). But because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit, in practice you owe only 36.1 per cent of the dividend paid to you.

Note that dividend income, like savings income, is taxed after your non-savings income - for example, wages and self-employment profit - at your highest tax rate. For example, if it falls both sides of the £35,000 basic rate tax limit, it will be taxed partly at 10 per cent (and covered by the tax credit) and partly at 32.5 per cent (less the 10 per cent tax credit).

Source - http://www.hmrc.gov.uk/taxon/uk.htm#4

[pjclar02]

You also need to consider the benefit-in-kind on what would become a company car (as you reference diesel and services as expenses) and the tax and NIC payable on this benefit. Alternatively you would need to consider whether you would be better off holding the car privately and charging mileage to the company.

[robbob]

There is a comparison tool here

http://www.hurrenaccountants.co.uk/news
Click on tax calculators and then Incorporation calculator.

However as pj mentions there can be different tax treatment on things like cars and use of home for companies and sole traders that can make things a little more complicated,although if Dale is using the 45/25p mileage route then the motor claim would be the same for both ltd company and sole trader.

I would also say generally a limited company is more paperwork involved and you need to be a little bit more disciplined with the business finances and business record keeping,although it makes sense to be disciplined whichever route you take particularly as the taxman doesn't ask for cash on the business profits for a considerable period of time after the profits are made.

[King_Maker]

Revenue will be at least 500K and I'm not looking to take much salary if deferring is more tax efficient

I would be surprised if a limited company was not the better financial option, provided you don't want/need to extract all the profits.

A salary at EL for NIC plus dividends is often the best choice.

But I recommend professional advice, as everyone's circumstances are different.