Tax benefits of a Ltd Company VS self employed

[GiulioUK]

Hello everyone, this is my first post here, so please bear with me.

I'm in a dilemma that I believe is very typical of any freelancer: how can I get the most out of my earnings and pay the least amount of tax. I am a software developer freelancer, turning around just over £50K a year (last year, it was less the year before). Currently I work as a self employed, but I've heard that if you are operating under a ltd company you can pay yourself salary and dividends and get great tax benefits as compared to being self employed. For example, on my self employed profits of just over £40k last year, I was left with around £31K after paying taxes. However, ww w.income-tax.co.uk - if this tax tool is right (scroll down to the dividends section in the "Other income sources" section, and set the salary income to £0, if I take out £40K in dividends, I'll be left with over £38K. That's a huge difference. Am I missing something, or is this how things are?

Thanks in advance for your advices.

[Darren at Fox-Bartfield]

Tax

The limited company model would be a lot more efficient at that level. I'd suggest a run through the pros and cons with an accountant who should be able to provide you with some comparisons.

[GiulioUK]

Ltd

The limited company model would be a lot more efficient at that level. I'd suggest a run through the pros and cons with an accountant who should be able to provide you with some comparisons.

Thanks Darren, all clues point to the fact that that's the way to go (ltd).

[TheCyclingProgrammer]

A Ltd company would be more efficient but your numbers are wrong. Dividends are from post tax profit and you haven’t accounted for corporation tax.

The primary tax saving is not having to pay national insurance. The tax difference between income tax on sole trader profits and and corporation tax and income tax on dividends is not that great.

The secondary tax saving and probably best one is being able to retain profits in your business and not draw dividends at the higher rate unless you need them.

[Jessica@WhiteFieldTax]

There are some figures here that may help you - https://yogatax.co.uk/help/working-limited-company/ - the narrative is designed for a different client group, but the figures are representative of how things would look for you based on the information you've given.