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I have a full-time job, and as a second job I work as a contractor for another company. Since the income I get from my first job is enough to pay for my living expenses, I am currently saving and investing the income I generate from my second job as a contractor.

I was thinking of setting up a Limited Company (based in the UK) that I would use to offer my services as a contractor. Since I don't need this money to pay my living expenses, I was considering investing in real estate or the stock market through this Limited Company. In other words, the company would have revenue coming from the services I offer, and the company (of which I'm the director and only shareholder) would invest this money. If in the future I want to extract money from the Limited Company, I could pay myself an income, or pay dividends.

I have several questions about this:

  • Am I allowed to do this? i.e. investing in financial instruments or real estate through a Limited Company instead of doing it personally.
  • Which is more tax-efficient -- to pay income tax on the money I'm being paid as a contractor and then investing this money, or to charge the money through a Limited Company and investing the money through it?
  • Would I be allowed to buy certain things with company's pre-tax money, as company expenses? If so, what sort of things?
  • this answer might help for points one and two – Steve Smith May 15 '18 at 15:38
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Yes, you can invest through a company from savings accounts to equities and property. As to whether or not it is tax-efficient - or indeed a good idea - would depend on your personal circumstances. Also keep in mind that there are always risks in investing, even if you seem to be doing well at the moment.

It is usually more tax efficient to contract through a limited company than in a personal capacity, as you can reduce your income tax liability. Normally you would draw a salary up to the National Insurance threshold (currently £702 per month), which is offset against corporation tax. Any remaining profit you want to take out of the company is usually drawn as dividends. However, in your case the most efficient strategy would likely be affected by your other income.

Making investments personally is usually more tax efficient as individuals receive a tax-free allowance for capital gains tax. However, there comes a point at which it is unattractive to withdraw further dividends from a company due to reaching high levels of personal taxation, at which point funds start accumulating in the company. By far the most tax-efficient way to invest the remainder would be to pay it into a pension, which attracts no personal taxation and can be offset against corporation tax. When the day comes to liquidate the company, you may qualify for entrepreneurs relief, which attracts a lower rate of taxation than claiming dividends.

You can claim expenses incurred in the cost of doing business against the company, including mileage, insurances and equipment. The are various rules on what qualifies as an expense, and what is offset against corporation tax.

Due to the more complex nature of your finances, I would strongly recommend speaking to an accountant (a cost that can be expensed against a limited company). As you can see, there are a number of taxes and allowances that come into play. They will be able to give you tailored advice based on your individual circumstances and provide guidance to help you avoid falling foul of HMRC. However, as a general rule, contracting through a limited company is more tax-efficient than being self-employed, and investing through a pension wrapper more tax-efficient than any other means.

  • Tax-free allowance for capital gains tax is interesting if I plan to either sell some of the investments or collect any dividends paid by the companies whose stocks I own (or in other similar situations). But if that's not my intention -- I plan to just buy-and-hold and reinvest dividends -- would the tax-efficiency of contracting through a limited company offset the tax-efficiency of investing individually or through a pension wrapper? – user139019 May 15 '18 at 17:42
  • It is likely that a limited company is the most tax efficient means for you to operate as a contractor, provided you are not caught by IR35, primarily down to not needing to pay National Insurance as long as you structure your payments correctly. If you put 100% of your profits directly from the company into a SIPP or similar, your tax liability would be close to zero. If you choose not to use a pension wrapper, I am sceptical that investing using profits retained within the company would be beneficial. Assuming the investments didn't tank, you would still need to extract them eventually. – webdevduck May 15 '18 at 21:22
  • There are tax efficient means to liquidate a company and extract the assets, but it cannot be predicted if they will still be available in years to come - the government could change the rules. – webdevduck May 15 '18 at 21:28

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