Avoiding tax as a teacher?

nala67

Hi there,

I am a full time teacher on £46.5k. I also private tutor - I am in a high tutoring area due to grammar schools and make roughly £1,500-2000 per month (dependent on holidays). This works out at a maximum of £24k extra per month. If I declared this as self employed then I’d end up paying 40% tax on a chunk.

I don’t immediately need all the money. I have set up a company for my tutoring business and I invoice all my tutee’s after every lesson. Am I able to benefit from taking my earnings as revenue, off setting costs, then paying corporation tax on the profit and only withdrawing the 0% dividend amount (keeping the rest of the profit in RE)? 

Is there another way that’s better?
thanks! 

nala67

Per year* not month (I wish!) 

oldbikebloke

you have answered your own question

the company pays corp tax on its profits. If you take a salary from the company that would be subject to personal tax, so whilst the cost would reduce the company profit so less CT, it is pointless as you personally would be taxed at 40% on your employee earnings

the tax rate on dividends is effectively the same as income tax, the saving is you do not have NI to pay on dividends. Overall therefore taking a dividend results in slightly more post tax money for you than taking as a salary.

but since your objective is to avoid personal tax, all you can do is withdraw 2k per year (current limit) as dividends and leave the rest in the company - assuming of course you have no other dividend income from outside the company. If that is the case then you really ought to be thinking about what you doing with your relatively high income if you have no savings or investments as yet. 

in the longer term (subject to tax rule changes) you would a) stop trading (the company has the status of "investment company" where you take annual dividends to run down the company bank balance then b) when the bank balance is below 25k (under current rules) you finally close the company and withdraw the residual cash through a voluntary dissolution. That 25k is tax free under such circumstances as it is deemed to be a capital distribution. If you try and do it early (ie with >25k still in the company), you will need a licensed liquidator to do the close down for you.

HappyHarry

You could make company contributions to a personal pension, avoiding both corporation tax and immediate personal taxation. It would mean that funds will be tied up until age 55/57 but you mentioned you do not require the monies now.