I currently have a 'day job' as a web designer. I am considering taking on some freelance work which I have been offered and this would be completed in evening/weekends whilst also retaining my day job.

I am trying to work out the most tax efficient method of operating these 2 income streams together.

I am confused by how much tax i would pay (ignoring deductions for now) if i chose to operate the freelance work as a limited company.

  • My day job salary is currently £49000 per year
  • My projected income Jan-Dec this year from freelance is £26500

From my initial investigation it would appear that by using a limited company setup, I would pay 20% corporation tax on the freelance income and would be able to pay that money to myself as a dividend which would incur no further tax. Is this correct?

If not, what would be the most tax efficient method of operating?

  • Tax questions are always subject to local laws. As such, getting your tax advice from the Internet is unwise as the Internet is global. It is best for you to seek advice from an accountant or lawyer who is familiar with the laws to which you are subject. – Jack Swayze Sr Jan 1 '16 at 18:47
  • 4
    @JackSwayzeSr That's why we use country tags -- so that people who know about U.K. taxation can provide some information that is relevant to the question. – Chris W. Rea Jan 1 '16 at 22:00
  • Taxation of dividends Is going to change radically soon so you need to talk to an accountant – Pepone Jan 4 '16 at 21:09
  • As a side point, your Jan-Dec income doesn't matter, it's your 5th April to 4th April income that does. This means your next 3 months may want different logic applying to it than the following 9, as you're spread over 2 tax years. – Matthew Steeples Jan 5 '16 at 23:45

If you had earned that this year you would have to pay roughly £10,600 tax (between corporation tax and dividend tax) on your freelance work based on the calculator here - https://www.nixonwilliams.com/dividend_calculator.asp

The tax on dividends is changing in April 2016 to a different sliding scale. However, this might not affect you that much as you are already in the higher tax bracket from your salary so your dividends would already be quite highly taxed.

Any expenses you could put through your company would offset both the corporation tax and dividend taxes due.

  • Would opting to operate as a sole trader be much the same therefore, without the extra hassle of setting up and running a limited company? – Marty Wallace Jan 5 '16 at 16:08
  • Sorry, I don't know about operating as a sole trader as I work via my own limited company, but I assume the tax paid will be similar. – Richard Dalton Jan 5 '16 at 16:18

You are already paying income tax at the highest rate, so don't pay yourself a salary. You can pay a huge amount into a pension every year, which will be tax free (not sure if that is £25,000 or £40,000); a large portion of that you can later extract as a lump sum. After that payment and all your cost is deducted, the rest is profit on which you pay 20% corporation tax. That is unavoidable.

To extract money from the company, you can pay yourself dividends. Alternatively, you can leave the money in the company for any length of time which is tax free apart from the corporation tax that you already paid; you can then extract the money via salary and dividends when retire.

For example, if you don't extract any money now, your company will own £26,500 minus 20% after a year, that is £21,200. Do that for 20 years, then you can retire and extract £10,600 tax free salary and £10,600 tax free dividends for the next 20 years after that. Your company can also invest for example in real estate, or anything else that keeps and/or increases value.

If you need the extra money, then it doesn't make too much difference; you will pay a high tax rate anyway, but I think you'll be a tiny bit better off by paying dividends instead of salary.

  • But i would need access to the funds every couple of months - what is the best way to operate there? – Marty Wallace Jan 5 '16 at 16:09

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