Limited company or sole trader for £20k annual profits ?

[Deleted User]

I work as an employee and get close to £100,000 from my salary.

Plan to use some of my free time doing extra work as a self employed person but realistically this will amount to about £10,000.

My question is will it be more tax efficient to:
1. Be a sole trader and just pay 40% tax on all profit (ouch)
Or
2. Form a limited company?

Life is a lot simpler as a sole trader based on all my research, for that level of earnings, but I cannot see how a limited company is more expensive because I can pay out dividends tax free, annually, to me and my family. That’s a saving of £4000/year of tax if I earn £10,000 yearly.

Even if my accountant charges £1000/year, it’s still a £3000/year saving. My accounts will be simple too, given I will only charge consultation fees, and plan to do 30 consultations a year.

What’d ya reckon.

Gabbs_the_Newt

I reckon you haven't factored in that any immediate earnings over £100k are effectively taxed at 60%, which makes the ltd co option seem very attractive.


(i can't post links, but google "hidden 60% tax rate")


But really you need to spend an hour with an accountant who can advise on all aspects.

Dazed_and_confused

Dividends are not "tax free" (unless in an ISA or other genuinely tax free wrapper) and you have misunderstood how dividend taxation works.

For example say your taxable salary was actually the £100,00 you mention and that was your only income.

You would get full Personal Allowance of £11500.

But if you had dividends of £5000 your personal allowance would be reduced by £2500 to £9000.

So you pay 0% tax on the dividend income but have an extra £1000 tax to pay overall so the dividends have an effective tax rate of 20% in that situation.

Can be more for other income types as Gabbs the Newt mentions.

TheCyclingProgrammer

You also mention paying out dividends to you and your family. Which family members were you planning to make shareholders? Any dividends paid to then would belong to them, not you.

kidmugsy

Your little company could use all its profits in contributing to a pension for you. That will avoid Corporation Tax and Income Tax, and leave your Personal Allowance unviolated.

Sarastro

Agree with Kidmugsy, far more tax efficient to pay additional pension contributions meaning little tax to pay on the additional income.

And if you put this money into a SIPP, I believe you can get back the higher rate of tax, rather than the standard 25%. I think you have to claim this through your tax return - guess your accountant will know.

The personal allowance for div's is decreasing as well from next year to just £2k (I think) so that's all you could give to other directors each year without them paying tax on it.

Dazed_and_confused

The suggestion was for the company to make the contribution not the op so there wouldn't even be basic rate tax relief added never mind higher rate relief.


And if you put this money into a SIPP, I believe you can get back the higher rate of tax,

kidmugsy

Dazed_and_confused wrote: »

The suggestion was for the company to make the contribution not the op so there wouldn't even be basic rate tax relief added never mind higher rate relief.

No relief would be due because the taxes would have been completely avoided.

[Deleted User]

Thanks everyone for your replies. I've decided just to go sole trader and pay 40% tax on my profits (when I reach the 60% threshold will speak to an accountant!) minus expenses.

I'm now left with my Limited company that I incorporated 3 days ago. No trading has taken place and I want to dissolve it. I know I should complete a DS01 and send it with £10 to HMRC. Accounts-wise - do I need to submit anything else?

Thanks everyone. I'm really good at my job but really a newbie when it comes to limited companies...