I'm sure this has been asked 100s of times but could someone clarify very simply the tax I would have to pay if I incorporate instead of trading s/employed? Example: Say I turnover 80K pa. as sole trader. Very simply ----- Expenses = 10K. Profit = 70K. Taxed at 23% on 30K then 40% on the remaining 40K.
Could someone give the equivalent figures as if I were a ltd co? I know I can pay myself a lowish salary, and extract the rest with dividends.
You think what is "irresponsible"? - Simply working through a Ltd Co?
-OR- Paying out all profits as dividends?
The best comparison of tax paid through Ltd Cos against tax paid working as self-employed *must* allow for the personal income tax on the dividends, so it is totally *responsible* to allow for this in the calculations (otherwise the comparison tax through a company is too low).
"Matti Lamprhey" wrote
You made a big assumption there, which actually turns out to be incorrect - IANAA!!
Wow that's a fantastic answer Tim - thanks very much!!!!!!!!
I couldn't understand what Matti was on about - could you clarify? Would the tax man accept that ratio of salary / dividends ?
My profits are actually quite a bit more than in my original post -- can I assume that as we go up, the ltd co advantage lessens, or is it the other way round??
Neither -- what is irresponsible is ADVISING Ltd Cos to strap down salaries to the ~4895 figure and to pay the thereby-inflated profit as dividend. The IR35 and associated retaliations were entirely predictable, and many people were tempted to move from self-employed to Ltd Co on the basis of similar advice, finding themselves now potentially worse off. (And no, I'm fortunately not one of them.)
Normally I regard the argument "Just think what would happen if everybody did this" as utterly specious, but tax avoidance schemes are an area where it pays to consider it.
The taxman doesn't like it but if you're a genuine buisness he can't do much about it.
This is what IR35 was all about, an attempt to stop people using incorporation to reduce their NI contributions. But IR35 only catches you if you are doing something that wasn't a vlaid form of Self Employment
IR35: If you would have been "employed" by your client(s) (rather than "self-employed"), had you NOT done the work through the Ltd Co...
S660: Paying dividends to a lower-taxed shareholder (eg spouse) while paying "less than market salary" to the person actually "doing all the work"...
"Grunter" wrote
Well, the marginal "tax+NI" rate for all self-employed earnings over 37,295 is 41% (40% income tax + 1% NI).
The marginal "corporation tax + personal income tax" rate for Ltd Co profits between 50,000 and 300,000 is 39.25% (19% corporation tax then 25% personal income tax, as shown above - so NET amounts are profit x 81% x 75% = profit x 60.75%).
So 'Ltd Co' just beats 'self-employed' as long as profits remain at/below
300,000pa (after paying the 4,895 salary).
If Ltd Co profits exceed 300,000pa, then the marginal rate of "corporation tax + personal income tax" effectively becomes 49.56%[1] upto 1.5million pa (and 47.5%[2] over 1.5million pa).
[1]: profits x (100% - 32.75%[3]) x (100% - 25%) = profits x (100% -
49.5625%) [2]: profits x (100% - 30%) x (100% - 25%) = profits x (100% - 47.5%)
[3]: { (1,500,000 x 30%) - (300,000 x 19%) } / (1,500,000 - 300,000) 32.75%
The level you'd have to offer someone with similar qualifications to do the job, of course. The level you'd pay yourself if you weren't the sole shareholder.
Not necessarily -- IR35 status is nothing to do with your own previous working mode, all to do with the nature of your current client contracts.
But I'm really thinking of people like the doorstep milk delivery folk who were advised to make themselves into Ltd Cos and then found the IR making unanticipated demands.
No -- I try to MINIMISE it over the longer term, which isn't necessarily the same as doing it in the short term.
If you just 'happen to have' certain qualifications, which aren't required for the job, then why should they matter?
Also, there may be many people in India or China equally capable of doing the job, who would accept a much lower salary. Do you believe that you should ignore those? [Don't forget - if you weren't doing it yourself then you could often "off-shore" the work to India...]
But *you* wouldn't then be deciding the salary - if you worked for someone else! However even if you *did* have the chance to set your own salary (which was being paid by someone else), then "the level you'd pay yourself" could be rather high!!
"Matti Lamprhey" wrote
Of course! - I had assumed that you meant the work would generally remain the same before & after switching to Ltd Co status. Otherwise, your comment really doesn't make any sense, does it?
"Matti Lamprhey" wrote
But each tax year's return should be independent of each other! "Long term" and "short term" are red herrings - the lowest value of the SUM of different year's taxes, *IS* the sum of the lowest tax for each year.
Thanks again for the input Tim. I'm not into IR35 - it's not that sort of business. It seems that the financial advantage gap between the Ltd Co and sole trader reduce as earnings rise, all the benefits being available at the lower end. Looking at your figures plus what I've now found on the web (not nearly as detailed, but oddly a bit different from yours) here:
formatting link
at a very rough estimate I would be just about 7K better off pa with a Ltd Co. What with the accountant's costs, plus the regulation and increased paperwork headaches, it's not worth it to me. I prefer the simple life. The other Ltd Co advantages - credibility, credit, better for selling the business, are not really important to me. However I'm sure an accountant would try to persuade me otherwise, just for the business! Grunter
That website's figures are for 2004-05, whereas mine are for 2005-06 - but it has still pointed out an error in my calcs, for Class 4 NI. I used a threshold of 37,295 between the 8% and 1% rates, whereas it should have been
32,760 (= 52 x 630). Which means my figure shown before for Class 4 NI was
317.45 too high, so the advantage of Ltd Co over S/E is only 4,406.29 rather than 4,723.74 (if I'm right about the following point...).
I can't see where they got their figures from for "income tax as Ltd Co", of
5,192 (for 60K profits) and 13,292 (for 100K profits). The difference between these two numbers is correct, at 40,000 x 0.81 x 0.25 = 8,100.
But looking (eg) at the figure for profit of 60K :-
------------ Personal Income tax on dividend is:
0% on first 28,260(*), then
25%(**) on next 16,496.55(***)
(*) 31,400 * 90% = 28,260.
(**) 32.5% of (111.111% of dividend) less 10% of (111.111% of dividend) already paid is 25% of dividend
(***) (60,000 - 4745) x 81% - 28,260 = 16,496.55
Total income tax: 4,124.14.
------------
Their website quotes "5,192" - over 1,000 more....
Theirs, obviously. But where? I was about to give up and then it struck me that the difference between 5192 and 4124 just happens to be 22.5% of 4745. So I suspect they may have taken the HR threshold as including all income, not just taxable income. Observe:
The topic of corporate taxes are of interest to me. We are looking to establish a business in the UK and I have been doing research on taxes in the UK. I am having trouble with the "marginal relief" idea. When running examples with the form provided on the Inland Revenues web site I end up with different figures than when I use the online calculator. Can someone clue me in on how "marginal relief" works and possibly provide an example?
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