Ltd company contracting

[Jte123]

Good morning,

I am a new single director no employee ltd company owner.

I hear a lot of people are doing this set up as a contractor in your uk.

Can anybody help with the positives? I’m not asking for single person tax advice just a general ltd company benefit summary.

I’m struggling to get my head around the fact that if I earned £40k, withdraw my salary if £11k and £29k dividend then I don’t pay any tax on the salary within my personal allowance, first £5k I use my dividend allowance but pay £24k dividend tax and corporation tax on the remainder outside of the first £16k tax free allowances (£11k salary and £5k divs).

If dividend tax is 7.5% and Corp tax is 20% equalling 27.5% surely it would be better as a sole trader paying 20% on anything above your personal allowance?

This is not my income as it is now but should be this year but struggling to get any clear clarity on this.

If anybody can clarify any clear tax advantages on a general basis that you can use within a ltd company I would be very grateful.

Thanks

[GlobalTaxAdviser]

Hi

1) Optimal Salary amount is £8160

2) Work out Profits and take 19% Corporation Tax

3) Pay Dividend 5K is tax free and the balance at 7.5%. There is also around 3K of personal allowances unutilised. Make sure you do have the proper paperwork in place in issuance of dividends

With the dividend tax and the fact the dividend allowance is falling to 2K from April limited company tax benefits compared to setting up self employed maybe marginal.

Though there are other reasons why a limited company maybe beneficial

Be careful with IR35 too

[robbob]

surely it would be better as a sole trader paying 20% on anything above your personal allowance?

Sole traders pay 9% class4 NI on profits over approx 8k per year

[GlobalTaxAdviser]

Remember Corporation Tax Rate is falling and will go down to 17% and there is talk of 15% as well.

On the other hand I expect at some point the government will increase the dividend tax rate.

[AdamS93]

£40,000 as self-employed (ignoring Class 2 Ni @£2.85 per week);

Income Tax = (£40,000-£11,500)*20% = £5,700
Class 4 NIC = (£40,000-£8,164)*9% = £2,865
Total Income Tax and NI = £8,565

£40,000 through Limited Company - based on withdrawing all the profits as dividends

Corporation Tax = (£40,000 - £8,164)*0.19 = £6,049
Income Tax on Dividends = (£40,000 - £11,500 - £6,049 - £5,000)*7.5% = £1,309
Total Corporation Tax & Income tax = £7,358

Tax Saving = £1,207

Things to consider;
you can reduce income tax on dividends by not withdrawing them all from the company
The dividend allowance is going down to £2,000 (from £5,000) in 2018/19.
IR35
As above, corporation tax rates are falling
Accountancy fees will be more for managing a limited company as there is more work involved.

I might have missed something, it is still early after all...