- Corporations Tax
You will have to pay small companies tax at 20%. This is a flat rate on your company’s total profit. The good news is that because your company is running a business, not just earning a wage, it has far more tax deductions available to it to reduce its taxable profit, that are not available to a salary and wage earner.
Claiming deductions in your company’s name is far simpler than claiming them in a personal tax return, that’s why we recommend claiming all of your deductions here. More information is available on this
We register all of our clients limited companies for the flat rate VAT scheme. Flat rate VAT saves contractors both time and money and being registered for VAT is a good sign that you are genuinely in business, which is good for IR35 purposes.
The Flat Rate VAT scheme requires you to charge your clients VAT (currently 20%). Then when your VAT return is submitted (we’ll calculate it for you and tell you when to send it) rather than claiming VAT back on your expenses you simply remit a flat rate which is based on your industry or profession.
For example the flat rate for accounting and finance is presently 14.5%. So if you invoiced £1,000 you would add 20%, meaning you would receive £1,200. You would then pay 14.5% of that, which is £174 to HMRC. So by being registered for flat rate VAT you save having to account for the VAT on all of your expenses, and you pocket an additional £26 per £1,000, or 2.6%.
- PAYE & NI
We advise all of our clients to set their personal wage level to £7,000 per year, or £585 per month. The remainder of you income is then taken as dividends. By setting your wage level to this level you will avoid having to pay any NI or PAYE. This is one of the biggest advantages of working through a limited company. Avoiding PAYE is only a cashflow advantage, as you will still have to pay the same level of self assessment tax at the year end, this just means you will not have to pay upfront PAYE.
However saving NI is a significant saving, as you save on both employee’s and employer’s NI
On a salary of £50,000 you would pay emloyee’s NI of £4,380.50 (£35,250 x 12% + £7,525 x 2%) as well as employers NI of £5,924 (£42,928 x 13.8%). This is a total of £10,304.50 National Insurance that is saved, on a salary of just £50,000.
- Personal Income Tax
This is minimised as much as possible through the use of a greater variety of tax deductions that are available to limited companies but not individuals. This allows us to minimise the Limited companies taxable profit, and therefore minimise your eventual personal tax bill.
Another thing you need to be aware of is that an ordinary wage earner has their tax deducted from each pay packet each month, so they pay their tax as they go. As a contractor your limited company is paid gross of tax. If you were an ordinary employee it would still be required to withhold PAYE and NI from your wage and pay this to HMRC quarterly. However because your wage is set below the PAYE and NI threshold no PAYE or NI is withheld.
The NI you save here is a genuine and quite significant saving. However you need to be aware that the PAYE you save will still be payable at the end of the year when you do your personal tax return. As a result it is important that you save enough of each of your invoices to cover this bill. However this is still not the end of it. When you submit your personal tax return HMRC require you to pay the entire outstanding amount, and they also require you to pay an additional 50% as a deposit on next years amount. It can be tricky to ensure you have the right amount of money put aside for future tax liabilities. This is why your Live Tax Return is so important.