Should I pay myself in dividends?

Paaarp

Hi all,

I currently work as a self-employed freelancer.

I earn about £3,000 per month / £36,000 but can go up to £4,000 per month on a good month.

Is it worth becoming a limited company so that I can pay myself in dividends, considering I'm only earning this amount?

Would I save much money vs the costs involved in setting this up?

Are there any other benefits to consider in doing so? I work from home if that helps.

Also, I'm in the process of hiring people on a freelance basis to do some of the work for me. This would be a new expense I would have to factor in.

Any one got any advice?

Thanks!

agrinnall

It probably is worth doing, there will be some cost and time overhead to having a limited company but the financial benefit of paying yourself dividends may well outweigh this. It's probably worth half an hour with an accountant to review the figures.

PlutoinCapricorn

Do you expect to stay at this level, or go up or down income wise?

The personal allowance may go up, keeping you below the higher tax rate band, which makes incorporating seem less attractive. Keeping some money in the company is all very well - if you don't need it for personal use.

martinsurrey

assume no expenses and £36k income/profit

Current
(using FY16/17 tax rates):
Income tax = £5,000 = (36-11)X0.2
National insurance = £2,660 = £2.8*52 + (36000-8060)*0.09
Total tax = £7,660
Net income £28,340

Company: Pay yourself a £11,000 salary and a £20,000 dividend
Company net profit = £25,000
Corp tax = £5,000 = 25X0.2 (no company NI due to the employment allowance)
Employee NI = £353 = (£11,000-8060)*0.12
Dividend tax = £1050 = (20-5)X0.07

Total tax = £6,403
Net income = £29,597

So a company is better off by about £1.2k, but you will need to factor in more expenses (accountant fees if you cant learn to do them yourself).

As the Corp tax rate falls to 18% you would save £500 in corp tax.

If you have a partner (as in wife/husband) you could share the company shares out and reduce the tax you pay even further.

If the company pays any individual over £48,000 (so a £11k salary followed by a £37K dividend, as this is an income of £34k after personal allowances in new world dividends) you would be paying an effective marginal rate of tax of 44.65%, which is higher than self employed)

However, even without involving your significant other in the share structure, this is equivalent to the company earning £56k a year.

All in all, its not massively better either way on the face of it, but a company should win, and with good advice from a paid professional, it offers ways to be clearly better (with a good company structure).

chrismac1

For 2015-16 tax year the net saving would be £2k or so, after extra accountancy costs. For 2016-17 the new dividend tax will come in, which will add £1,725 to the same strategy probably. The "probably" is because the Government has yet to answer some questions about exactly how the tax will operate, and it is not in the Finance Bill so unlikely to become law until 2016.

There may well be other good reasons for you to operate as a limited company, espeically limited legal liability. Plus some businesses will not deal with sole traders, in some sectors this is the norm.

Pennywise

chrismac1 wrote: »

There may well be other good reasons for you to operate as a limited company, espeically limited legal liability. Plus some businesses will not deal with sole traders, in some sectors this is the norm.

Exactly this! I had a free meeting with a potential client a couple of months ago, and we went through the pros/cons of limited versus sole trader etc which took a couple of hours of my valuable time. I got an email back from him afterwards saying he was going to a different accountant who had recommended being a sole trader and quoting a much lower fee than I did. Last week, the same guy emailed me again, to say his potential clients would only deal with limited companies and that his "new accountant" who turned out to be unqualified didn't do limiteds, so could he appoint me instead!

chrismac1

Nice one Pennywise! Around my area, it is more common to find folk saying "Yes I can do limited company accounts" and it then turns out when you see the final product that it is clear whoever has done them has zero knowledge of the Companies Act.