What is a Higher Earner?
For the purpose of this article we have defined a higher earner as a self-employed individual that earns over £25,000 – £30,000 a year.
This is a lot lower than HMRC’s definition of a higher rate Tax payer of £50,000 where the Tax rate jumps to 40%. But our threshold might not be as high as you think to benefit from Tax efficient planning as you will see below.
What are the Benefits of Being a Limited Company?
For the higher earners, it is quite simply lower Tax bills, or larger CIS repayments if you work in the construction industry. There are also other benefits including:
- Limited liability – if the business was to fail then you would not be personally liable for any company debts
- Increased chances of finding work – some contractors will only choose to trade with limited companies instead of sole traders
- Business branding and awareness – trading as a limited company can improve perception by other parties
- Ability to transfer income to friends and family (reducing Tax even further)
Who Can Trade as a Limited Company?
Pretty much most people! You must be 18 or over, have a valid national insurance and a UTR number.
There are no minimum number of employees that a limited company needs. There are no qualifications and no minimum or maximum turnover.
In order to set up a limited company you must register with Companies House. If you have an accountant or agent, they can set this up for you. All that is required is the unique name of your company and details of any additional shareholders but only if required.
Additional shareholders are entitled to a share of your profits and are only liable to pay 7.5% Tax (above £2,000). Perfect for those sole traders who wish to utilise spare Tax allowances for their partners.
How Will Trading as a Limited Company Save Me Tax?
As standard sole traders will pay 20% Tax on earnings and 9% National Insurance and £3.05 a week NIC this year (2020/2021). Limited companies only pay corporation tax at 19% and no national insurance.
Please see below an example tax computation for 2020/2021 tax year using profits of £30,000.
|Sole trader Tax Position|
|Less personal allowance||£12,500.00|
|Amount liable to tax||£17,500.00|
|Income tax (20%)||£3,500.00|
|Class 4 national insurance (9%)||£1,845.00|
|Class 2 national insurance (£3 a week)||£156.00|
|Total tax payable||£5,501.00|
|Corporation Tax Position|
|Amount liable to tax||£20,500.00|
|Corporation tax (19%)||£3,895.00|
|Profit after tax||£16,605.00|
|Less dividend allowance (£2,000)||£14,605.00|
|Less Remaining personal allowance (£3,000)||£11,605.00|
|Dividend tax (7.5%)||£870.38|
|Total tax payable||£4,765.38|
TOTAL SAVINGS FROM TRADING AS A LIMITED COMPANY: £735.62
What Obligations do I Have ?
When registering with companies house you have accepted to follow the Companies Act 2006. As a company director you are obligated to carry out several financial responsibilities.
Although you should appoint an Accountant to perform these, it is still your responsibility to ensure the following tasks are done:
- Keep clear and accurate records that have a traceable paper trail in case of HMRC audits and must be used to create a set of accounts that shows the companies true financial position
- Submit accounts with Companies House on time
- Submit a Corporation Tax return to HMRC and pay all tax owed on time
- If paying wages to yourself or staff, you must ensure a fair wage is paid and no less than the national minimum wage as well as making sure and income tax and national insurance deductions are paid to HMRC on time
- Inform Companies House of any changes before submitting an annual return
Hopefully you will see there are many advantages to trading as a limited company. Please get in touch below to find out more. With Edgemark Accounting, our pricing plans for limited companies start from as low as £30 per month + VAT.