Setting up Limited Company for Contractor Tax

copper1066

I have a full-time job with a 60k PAYE salary and have also recently started a contracting job that pays 5k pa. I'd like to minimise the tax on the contracting job and wanted to know whether this was best done by setting up a limited company? My understanding is that I can cut my tax bill on the 5k this way. Any advice from anyone

00ec25

do you actually need to spend any of this extra 5k?

provided your "contracting" work actually allows you to do it as a company rather than as an employee caught by IR35, for such a modest sum of money using a company will shelter it from tax compared what you'd pay adding it to 60k income, but the costs mean it won't be as much as you may think.

do you have any dividend income of your own already from personal shareholding etc ? if yes, is it more, or less, than £2,000 per year?

are you married? is your wife on a lower income than you? if yes, that opens up the option to transfer the income to her via differential shareholding.

But overall with only 5K, the single absolutely most tax effective thing you could do is for the company to pay 100% of its income into a pension fund in your name (assuming of course you are not already at the £40,000 per year max allowed.) Do that and there will be no tax to pay at all.

admin costs of the company - can you produce statutory format company accounts? if not you'll need to pay an accountant and that could cost £800 - £1,500 per year.

if you don't pay a pension then position would be:
1. admin costs of the company as above
2. 19% corporation tax on profits
3. 32.5% tax on dividends

so 5,000 - 800 admin = 4,200 profit less 798 (19% CT) = 3,402
leave £1 in the company so it remains solvent and legally able to carry on. Lets assume you have zero existing dividends (somewhat unlikely for someone on a 60k income) so take residual 3401 less 2,000 dividend allowance = 1,402 to be taxed @ 32.5% = £455 tax

effective tax rate: 5000 - 800 - 798 - 455 = 2,947 so 41.06% of the income has been taken in tax and costs
compare that to paying 40% income tax + NI on the 5k in the first place, and you will see that there is no spectacular win by using a company

polymaff

You also need to tell us more of your plans. If you've "recently started" and projecting £5k per annum - is that it? There can be many advantages to a Limited Company, but how will you justify the extra burdens which accompany it?