Do I really pay less tax as a limited company

[PurpleGorilla]

Not to mention that the figure coming in (before tax) is quite probably a fair bit larger than you had as a permanent job. So even if it's taxed similarly, you end up with more.

Kerching!

[ItRYmyBEst]

Yes your company pays CT @ 20% on its profits. However, you only pay income tax on dividend income once your total gross income exceeds £41,865 in the current tax year. If this is exceeded then you will pay income tax @ 25% on the net excess. No national insurance (Employees or employers) is ever paid on dividend income either of course, so still far more tax effective to operate through your own ltd company outside of IR35 and take a small salary of £663 per month (where no PAYE/NI is payable), take allowable expenses such as business mileage and dividends.

Thanks I get it know All the answers are really good on my question

btw what do you mean by net excess? The amount of my salary over £41,865?

[ItRYmyBEst]

Kerching!

Yeah that really is a good point

I could in essence work for 4 months and not work the next 8 and that would be really tax efficent as I would hit around 40k.

This is my 1st contract though and its hard to only take that 3k out a month and see all that money sitting there. I think I will still £663 a month into a pension and look at giving a good percentage to charity (although it seems complicated given the answers to my other question on this matter.)

[ItRYmyBEst]

Plus the ability to build up a warchest and only pay higher rate income tax if you *need* to, whereas you have no choice if you are self-employed and earn over the threshold, which IMO is probably one of the biggest advantages overall.

how big should you let your warchest get before you dissolve it ( or diversify it by purchasing company assets/property )in a tax efficient manner?

[TheCyclingProgrammer]

how big should you let your warchest get before you dissolve it ( or diversify it by purchasing company assets/property )in a tax efficient manner?

How longs a piece of string? How much would you need to be comfortable?

I prefer to think of my war chest in terms of the number of months it would sustain regular quarterly dividend payments to my wife and I (she has a 25% share) up to the higher rate threshold should I stop earning.

I prefer to have at least 12 months and certainly no less than 6 months. The more the better to be honest, it depends how regular your work is and how much income you need to live (we can live comfortably on salary and dividends up to the higher rate but you may not).

I'd always take dividends up to the higher rate threshold regardless of how much retained profit that leaves me as you cant ever carry that basic rate band forward, even if I needed less to live on. Stick the rest in personal savings, your war chest doesn't have to exist solely in your business profits.

[Forbes Young]

Thanks I get it know All the answers are really good on my question

btw what do you mean by net excess? The amount of my salary over £41,865?

Excess income above the effective Higher Rate tax band of £41,865. So for example if you took a salary of £8,000 in the current tax year ended 5/4/15, you could in addition take up to £30,478 net dividends before you pay any personal income tax. So if your company made a post tax profit of £30,478 all the tax you pay would be the 20% corporation tax on the company's pre-tax profits (of £38,098). This little example assumes you don't have any other taxable income in this tax year of course. No NI is payable on any dividends either.

[CanadianExpat]

Yes!



One on left is salary to £10k and then dividends, one on the right is salary only. The difference is much larger than I'd realised.

[CanadianExpat]

Yes!

Not my creation, I should add. I found it in an accounting book and thought it was so brilliant that I got the supporting data from the author.

[Forbes Young]

Not my creation, I should add. I found it in an accounting book and thought it was so brilliant that I got the supporting data from the author.

Yes - effective diagram. The % of take home remuneration for a contractor with net profits much lower (say around £40k) is much higher again compared to the figures shown in the diagram, due to the fact that no income tax on dividend income is payable until the £41k tax threshhold has been breached (so approx a £8k salary and £30k net dividends can be taken without paying any income tax).

If it weren't significantly better to operate through their own ltd company, then few contractors would choose to do so and instead go through an Umbrella or seek permanent employment.

[jamesbrown]

If it weren't significantly better to operate through their own ltd company, then few contractors would choose to do so and instead go through an Umbrella or seek permanent employment.

I guess I'm one of the "few"...