To be or not to be (a limited company)
Former tax inspector and current Tax Specialist at Critchleys, Gerry Jackson, spells out the implications surrounding the decision to change from being a self-employed or partnership business and become a limited company.
The self-employed situation
As a self-employed businessman or woman, you pay tax at a minimum of 20 per cent on your profit. Sometimes, you won’t actually receive all of that profit because some it might be tied up in stock or a work in progress. There are also National Insurance payments at an additional 9 per cent.
Incorporating into a limited company
It is more complicated as a limited company because of the paperwork that needs to be filed with Companies House but it can be done in a way that is more tax efficient. You can set up a company and pay yourself a salary just below the National Insurance Threshold, which means the company will pay 19 per cent in tax. Additional payments can then be made as dividends, which won’t be completely tax free but will be a lower payment.
The complication threshold
If somebody is making a lot of money – like £150,000 or £200,000 – it might seem obvious to become a limited company. Actually, when that money goes into a company and comes out as a dividend, the extra tax on the dividends is quite a lot more than the savings on National Insurance. So, for somebody who's making large amounts of money but spending it and not leaving it in the company, they would be worse off as a limited company.
In a nutshell
To make being incorporated worthwhile, you have to be making more in tax savings than the additional running costs of the limited company. If your business is making £25,000 or more, you’re probably thinking it would be worth becoming a company but when you reach about £100,000 it becomes complicated because the new tax restriction on dividends kicks in.
Hope is here
It all sounds complicated because it can be so I have developed a calculator to help simplify the decision.
Find out more about Gerry Jackson