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I am a UK resident, IT freelancer with a UK limited company working with a US client. I am wondering if it makes more sense to switch to an Estonian company. Having read the following article I am still not clear.

In the UK, if my company earns in revenue say £ 4000, I will pay 20 % corporation tax leaving me with £ 3200. I then pay out a salary of 3200 to myself and pay UK income tax on that which leaves around 2560 actual cash. (Assuming I get 20% personal income tax in the UK but not sure.)

With an Estonian company, no corporation tax is paid but 20% tax is paid on distribution of profits. If the revenue is £ 4000, when I pay my salary does that count as distribution of profits? Or will I receive the full £ 4000 and then pay UK personal income tax?

  • You have to pay income taxes in the country you are resident. So yes, if you pay out yourself 4000 in UK you'll have to pay UK income tax on that. – brt Nov 16 '17 at 20:13
  • @brt thanks for your help but that doesn’t really clarify anything. I already acknowledged that I will have to pay UK personal income tax in both scenarios – david_adler Nov 17 '17 at 10:51
  • What you say about the UK is totally, totally wrong. – gnasher729 Nov 18 '17 at 23:27
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OK, it's a bit of a minefield but here goes!

  1. You only pay corporation tax in the UK on any profit made, so your "salary" would not be classed as part of the profit, so in the example you give you would only pay corporation tax on £4k less your "salary" ie £3,200 so profit on the £800 remaining gross profit.

  2. You don't say if your figures are monthly, annual etc, but you only pay income tax if you earn over £11.5k in any given tax year, the rates increase as your income does, check here: https://www.gov.uk/income-tax-rates

You may have a different tax code, you would need to check that with HMRC but the link gives the "default" position which is correct for most people.

  1. When you refer to "disctribution of profits" I think you mean "dividends" - in the UK if you pay yourself a dividend the tax rate is lower, see here:

https://www.itcontracting.com/limited-company-dividends/

If the figures you give are monthly then I would consult an accountant as they are likely to save you more than they will charge for their services.

You will probably find it is most tax efficient to pay yourself a dividend from the company's profits but check with an accountant.

More info:

https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company

  • Thanks for your help @davidjwest but that doesn’t really clarify the Estonian rules. I do have an accountant but they can’t advise me on Estonian business rules – david_adler Nov 17 '17 at 10:50
  • It won't make any difference (or not significantly) as the Corporation tax rates are almost the same (1% difference) and the income tax would be payable at UK rates as you are a UK resident. I was merely pointing out that taking dividends will probably be more tax efficient than drawing a salary, but check with an accountant as they can give you advice on the exact figures. – davidjwest Nov 17 '17 at 11:03
  • Yes true certainly for UK, dividends is more efficient and thanks for the links. However, salary may be more efficient for an Estonian business as I think Estonia will not charge corporation tax on salaries, therefore I will only pay UK income tax. – david_adler Nov 17 '17 at 14:14
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In principle, when you are the sole owner of a limited company, and also the sole employee, then it is much easier to assume that someone else is the employee. Let's say your twin brother John Adler.

John Adler receives a salary from David Adler's company. Of course John has to pay income tax on his salary. Absolutely in the UK, and in Estonia as well if they have any sensible tax laws at all (which I assume but don't know for sure).

Then there is the company. It's profit equals revenue, minus cost. You said £4000 revenue, and John Adler's salary, plus anything the company has to pay on top of the salary, is cost, which is subtracted from the revenue to calculate profit. In the UK, the company pays 20% corporation tax on those profits, and the rest stays in its bank account (or may be in goods that the company purchased).

Where does David Adler come in? He owns the company, but doesn't work for it and gets no salary. He owns the company, but he does not own the company's money. He can't just help himself to the money. He can get a loan from the company, and is personally responsible for repaying that loan. If it's not repaid, HMRC will be very angry which will hurt. Or he can pay himself a dividend, and pays dividend tax on it. Or of course he can leave the money in the company.

That's exactly how it works in the UK, and I would assume Estonia to be similar. And of course if it's not the twin brother who is the employee, but the OP himself, then the situation is exactly the same.

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