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I recently set up a limited company and have an accountant taking care of much of the financial side. I wanted an opinion other than my accountants.

For the entire income I recieve from clients I am paying 20% corporation tax. If I pay myself £7kpa there is no income tax. I can take 30k dividends tax free, thereafter I pay 25% tax.

So I can take £37k pa @ 20% tax then everything after is 45% tax

If I was in a PAYE job, I would pay around 20% tax on 32k then about 40% thereafter. But I would also have holiday pay, sick pay and job security.

I know a guy on a much higher rate than me, about £500 per day, and he claims to pay around 18% tax which has me bewildered. He could be lying or misinformed ofcourse, but I wondered if there is something my accountant is not doing. At present I am failing to see where the benefit of a limited company is.

update

I had a chat with my accountant yesterday, who also brought up the point I would be liable to 12% NI if I were to take more as salary rather than dividend.

So I am paying

  • nothing on 7.9k
  • nothing on expenses
  • 20% Corporation tax on up to 32k Dividend
  • 45% (20% Corp + 25% income) on anything above the 32k

If I were not a limited company, I would pay

  • nothing on 10k
  • 32% on 32k (20% income + 12% NI)
  • 52% (40% income + 12% NI) on anything above
  • 2
    "I would pay around 20% tax on 32k then about 40% thereafter": no you wouldn't. You would pay nothing on the first £10k (personal allowance), then 20% on the next £32k (or the remaining £27k in your case). – Steve Melnikoff Aug 20 '14 at 20:52
  • Also, with your current scheme, it's not quite true that you would pay 45% after the first £37k, as corporation tax is paid on the company's profits after any salaries have been deducted. So if you take an amount of money as income, you'll pay income tax on it, or if you leave that amount in the company account, you'll pay corporation tax on it - but not both. (See, for example, here.) – Steve Melnikoff Aug 20 '14 at 20:59
  • I was under impression I am paying Corporation Tax on everything other than expenses. I read that link you provided. As I am paid 7k and the rest is dividends, there will be a fair amount of corporation tax and then tax on the dividend too. It may have been cheaper to pay higher salary. – James Aug 20 '14 at 22:06
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    You've forgotten the approx 12% employee's NI you aren't paying on that 30k of dividends. – Nigel Harper Aug 21 '14 at 15:30
  • @NigelHarper yeah my accountant reminded me of that yesterday – James Aug 22 '14 at 8:29
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I know a guy on a much higher rate than me, about £500 per day, and he claims to pay around 18% tax which has me bewildered

He will be showing expenses, which are deductible. Check with your accountant about expenses, which can be legally claimed as expenses. This is the main benefit of operating through a limited company. Legtimate business expenses can be claimed, which you cannot do if you are a permanent employee. Your friend might also be claiming false expenses, with a shady accountant. If HMRC does decide to give a call, he might have to pay n times the money he has saved till now.

And my suggestion is always ask your accountant first. He(she) knows the legal stuff, so he(she) would give you the legally correct options. If you aren't comfortable with him(her), you can always change accountants.

holiday pay, sick pay and job security

You miss those that is why you are paid at a rate much higher than an employee.

benefit of a limited company

You can arrange your salary to pay no PAYE and take the rest as dividends. You willn't have to pay PAYE on that. Secondly if you have a partner(s), all of you can be paid dividends without paying PAYE(if you don't cross the threshold).

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  • "All of you can be paid dividends" - if there is no reasonable reason for the partner to receive dividends, then you will be in deep trouble with HMRC. Like if you are responsible for 100% of the income and your partner is responsible for 0%. – gnasher729 May 12 '18 at 15:52
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I know a guy on a much higher rate than me, about £500 per day, and he claims to pay around 18% tax which has me bewildered

Your acquaintance may be using a tax efficient, or "marketed avoidance" product identical or similar to those required to be registered or declared under DOTAS legislation in the UK.

If this is the case then no, your accountant is not doing anything wrong - the 18% "tax" probably involves a radially different remuneration mechanism to the one you are using.

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Your company sends out bills, and pays expenses which are deductible from your profits, and say £50,000 for the whole year remain.

You can pay yourself about £8,000 per year without paying income tax and NI. That leaves £42,000 profit. You pay £8,400 company tax, leaving £33,600.

You then can pay yourself dividends. Anything until your income is £11,500 is tax free. Then £2,000 is tax free. Anything that brings your salary up to £43,000 or so is 7.5% tax rate. Everything above that is 32% tax rate. Now if you want to avoid paying that 20% + 32% tax rate, that's easy: Don't pay yourself more dividends. Leave the money in the company until you are retired, or you decide you want to take a few months off. Or pay up to £25,000 a year into a pension for the company director (you), which is tax free.

The people who got "creative" usually paid 7% for years, until they were picked up by HMRC and then it got expensive. They are not paying 18%. It is quite possible that "the guy" pays 18% legally.

The biggest difference is that you forgot that your salary reduces your profits. So for the first £8,000 there is no income tax, no company tax. And the numbers have changed in 2018.

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