I am not an accountant so YMMV. Also, tax rates change as they have since the question was posted.
In the UK salary employees are paid each month after all taxes. Most UK citizens simply don't think about tax. When you are a freelancer you pay the tax bills yourself. As per the calculations below you may find you pay more taxes than a typical salaried employee. A newbie error is to spend the income as a dividend to then get a big personal tax bill the following year. The tax office asked me for the previous years dividend tax plus half as much again as a "payment on account" against the estimated next tax bill. Tax suddenly gets very real when faced with a tax bill covering one and a half years. Taking out money to pay that tax bill then attracts more taxes the next year. While you are happily living as Neo in the tax matrix today if you become a freelancer you will need to take the tax red pill.
My estimates of the taxes are as follows. Your company will pay corporation tax. You personally will pay tax on any dividends you draw. The good news is that you get a tax allowance on the dividend you draw and the rates paid on dividends are lower than for normal salary. The bad news is that HMRC applies both taxes and IMHO they seemed designed to try to make you pay at least as much as the tax on a salary. As at 2019 the top google search result says:
The tax-free dividend allowance is £2,000. Basic-rate taxpayers pay 7.5% on dividends. Higher-rate taxpayers pay 32.5% on dividends. Additional-rate taxpayers pay 38.1% on dividends.
The really bad news is that you are almost a higher-rate tax earner on your current day job. As at 2019 the higher rate tax bracket starts at £50k and is 40%. Let us assume your salary today is £50k. Any income you draw from your company as a dividend will be hit at the higher-rate of 32.5%.
Assume your company invoices £26k and pays 20% corporation tax that's £5.2k company tax. Then you pay £6.1k personal tax which is 32.5% on (£26*0.8)-£2k where the £2k is the dividend tax allowance. So the total tax on the invoice is £11.3k. That is an effective tax rate of 43.5% which is higher than the 40% salary tax rate you just hit.
Your company does get to keep some VAT that you pass through. As you won't have a lot of costs you will be a “limited cost trader”. Today VAT is 20% that you add to your invoices and as a limited-cost trader, you forward onto HMRC at a rate of 16.5%. So that will be £1.6k a year your company keeps on top of the amount you invoiced. Yet that additional income is subject to all the same taxes as outlined above.
You only pay corporation tax after expenses. For freelance developers, expenses are not as generous as people seem to think. Even if you work from home a full day you cannot expense your lunch. The money your company can pay you to use your home as an office tax-free is a pittance. If you travel to visit a client you get some expenses such as a reasonable lunch and the cost of the travel but it isn't a significant amount. I don't think of business expenses as a perk; they are just the cost of doing business. You can do also do some client entertaining tax-free, yet that's a perk for them, not you. You can skip that and put money into a company pension plan and that would be buying entertainment for you when you hit 55 when you can take out a tax-free lump. That really is a perk.
Your company can buy some amazing computer hardware before taxes. Yet it is a waste of money to be doing that every year. It can buy a top range company phone but the SIMM only contract is a taxable benefit. Your personal tax bill will swell to include 40% of the SIMM contract cost. That is saving over buying a personal contract from your salary, but it doesn't really excite me. In the UK small companies don't get the huge discounts that UK consumers get. For example, you will pay charges for your company bank account and in the UK we are used to getting free personal-banking. IHMO you get hit with a lot of unexpected costs so it really isn't as rosy as people think. YMMV.
Your company can spend up to £300 a year on employee entertaining. Every year my wife and I enjoy a very exclusive company Christmas Party for two at a top restaurant. Bizarrely your company can give you a couple of hundred pounds of gifts tax-free each year as a "thank-you" as long as it isn't performance-related. Gifts cannot be cash but they can be a few hundred pounds of Amazon vouchers. Those perks along with buying yourself your dream computer and a top company phone do make it feel like you are winning; even if it is the taxman who is having the most success.
Once you take the red pill and see a few tax bills you might suddenly take a very keen interest in tax efficiency. My tip is to track the money of every paid invoice and assume the worst possible taxes on that invoice. By overestimating the taxes you will always be able to pay the tax bill and your company bank balance will grow. When it is about six months worth of money to live off then start creaming it off into a pension.
The most tax-efficient thing you can do is live off your main job and don’t spend the company money. The company account can then be your “rainy day” account for “life events”. If you ever lose your main job you can take out company money very efficiently. Let's say you lose your job on the last day of the tax year. You can then draw dividend up to the full personal tax allowance plus the dividend tax allowance without any personal tax. That is £14.5k tax-free. You will then pay only 7.5% dividend tax on the next £35.5k up to the higher-rate tax income. So that is only £2.6k of personal tax on 50k of dividend. You will then be laughing while the taxman isn't. You could quit your job and travel around the world doing freelance remote work enjoying those tax benefits and be really winning.
