Reply to: For your pleasure: sole trader vs company tax calcs (Google Sheets)

[WordIsBond]

Can you break down how you worked out the 19% that you save?

For every pound in salary that you pay, your company saves 19% Corporation Tax on that pound in salary. If we are talking about pounds that are over the NI threshold, then your company pays 13.8% in NI, but NI is a business expense and so you reclaim 19% of that 13.8% in CT savings.

So the CT savings is 19% * (salary + NI). Plugging in the numbers, every pound of salary over the NI threshold saves 19% * (1 + 0.138) in CT, or £0.216.

So, for every pound over the NI threshold, your company will save about 8% in tax (netting out the CT and NI). For converting income below the personal allowance from dividends to salary, there is no income tax difference. So going from an 8.5K salary to 12.5K costs nothing in income tax.

For salary above the NI threshold but below the personal NI threshold, then, there's no cost to you personally and savings to your company of 8% by reducing your CT. For salary above the personal NI threshold (9.5K) but below the personal allowance (12.5K), the cost to you personally is 12% (NI) and the savings to your company is 8%, which makes it not worth it.

So the most tax efficient salary for LtdCo contractors will be 9.5K. If you have more than one employee and are using the employment allowance, it will be 12.5K.

[WordIsBond]

How exactly you avoid paying NI on extra £4K?

I was wrong. Somehow it entered my calcified ancient brain that the NI threshold was going up to £12.5K. It's not, it is going up, I believe, to £9.5K. So you avoid paying NI on approximately the first £1K of the higher salary (from about £8.5K to 9.5K). That means the most tax-efficient salary will be £9.5K, for most people.

[proudfeet]

How exactly you avoid paying NI on extra £4K?

I also would like to know this.

[proudfeet]

Not once the higher threshold for employee NI kicks in.

You have no income tax on that extra £4K in salary, just as you had no dividend tax on it when it was dividends. Since you pay no NI on the extra £4K with the higher salary, for you it is a wash.

YourCo pays more NI at 13.8, but saves 19% on (salary + ERNI). So your company saves net about 8%. If you have two employees and claim the employment allowance, it's even better to go to the higher salary.

This is moot if the NI threshold increase ends up not happening, of course.

Can you break down how you worked out the 19% that you save?

Am I right in thinking that based on the CURRENT rates, my spreadsheet is correct (i.e. it shows the most tax efficient method) if we change the 17% CT rate to 19%?

[ladymuck]

FWIW, you don't need to pay up to the personal allowance to gain a credit for state pension purposes - you simply need to pay above the lower earnings limit.

Yes I know.

[Kugel]

Since you pay no NI on the extra £4K with the higher salary, for you it is a wash.

How exactly you avoid paying NI on extra £4K?

[TheCyclingProgrammer]

This is why I pay salary up to the income tax threshold. It also keeps my NICs topped up so, if there is still a state pension when my age group reaches whatever state mandated retirement age (probably 99 by the time I get there), I will at least receive enough for a cup of coffee once a fortnight. That and I have no issue with paying for the public services I use.

FWIW, you don't need to pay up to the personal allowance to gain a credit for state pension purposes - you simply need to pay above the lower earnings limit.

[Jolie]

deleted

[eek]

The personal liability aspect is only really valid for debts (which I won't be incurring any) as would need public liability or other liability insurance to cover any accidents or cock-ups caused. I don't intend incurring any of those either.

You have a different set of issues to me - I have SAAS in the USA to work for and against me. The insurance is

Sole trader does work but only in a very limited set of circumstances (consumer facing businesses) when working for other companies it's completely pointless.

[Hobosapien]

You can't be a sole trader if you work through an agency - agency act (1977 from memory) ensures that's the case.

Plus sole trader = unlimited personal liability - that isn't a sensible thing..

Aye, self-employed is a non-starter for normal contracts. Neither the agency or client will accept it as it opens them to potential liability for employer related taxes if HMRC deems the contractor was employed.

I'll be using self-employed status for my Plan B (now my Ltd is well closed) in the early days as it has a good chance of not breaking the personal tax allowance threshold, and if it does get that successful then I'll convert to Ltd. This spreadsheet may come in use to determine when the changeover may be worth doing financially wise.

The personal liability aspect is only really valid for debts (which I won't be incurring any) as would need public liability or other liability insurance to cover any accidents or cock-ups caused. I don't intend incurring any of those either.

[ladymuck]

Not once the higher threshold for employee NI kicks in.

You have no income tax on that extra £4K in salary, just as you had no dividend tax on it when it was dividends. Since you pay no NI on the extra £4K with the higher salary, for you it is a wash.

YourCo pays more NI at 13.8, but saves 19% on (salary + ERNI). So your company saves net about 8%. If you have two employees and claim the employment allowance, it's even better to go to the higher salary.

This is moot if the NI threshold increase ends up not happening, of course.

This is why I pay salary up to the income tax threshold. It also keeps my NICs topped up so, if there is still a state pension when my age group reaches whatever state mandated retirement age (probably 99 by the time I get there), I will at least receive enough for a cup of coffee once a fortnight. That and I have no issue with paying for the public services I use.

[LondonManc]

You can't be a sole trader if you work through an agency - agency act (1977 from memory) ensures that's the case.

Plus sole trader = unlimited personal liability - that isn't a sensible thing..

Beat me to it, with an extra caveat that most clients won't work with sole traders from what I've seen.

[WordIsBond]

1. Why £12.5k - a lower salary is will be more tax efficient due to NIC.

Not once the higher threshold for employee NI kicks in.

You have no income tax on that extra £4K in salary, just as you had no dividend tax on it when it was dividends. Since you pay no NI on the extra £4K with the higher salary, for you it is a wash.

YourCo pays more NI at 13.8, but saves 19% on (salary + ERNI). So your company saves net about 8%. If you have two employees and claim the employment allowance, it's even better to go to the higher salary.

This is moot if the NI threshold increase ends up not happening, of course.

[eek]

The 17% CT rate that they’ve already announced they’ll scrap????

That being said that's a useful sheet for anyone considering sole trader, which IMO will become a thing for IT contractors.

For the second sheet showing the effective tax rate graph, can you add PAYE in there?

You can't be a sole trader if you work through an agency - agency act (1977 from memory) ensures that's the case.

Plus sole trader = unlimited personal liability - that isn't a sensible thing..

[Lance]

Pease see

Tax calculator R+M 2 - Google Sheets

It assumes a salary of £12.5k for the company and uses the corporation tax rate of 17% as from April this year.

The 17% CT rate that they’ve already announced they’ll scrap????

That being said that's a useful sheet for anyone considering sole trader, which IMO will become a thing for IT contractors.

For the second sheet showing the effective tax rate graph, can you add PAYE in there?