The changing tides of managing personal income through a small limited company.

solidpro

Say I run my own 'one man band' as a limited company and consider it's costs, profit and loss my costs, profit and loss.

Currently income tax & NI on someone else earning £50,000 a year is £14,555 or 25%. The general direction of travel on this tax burden is static or reducing.

As a limited company director I pay myself £12,570 in salary, £37,700 in dividends which is subject to Dividend Tax £3,255 and CT of £7,163, eqalling £10,418 or 20.7% tax. The general direction of travel on this tax burden is increasing.

At what point does an increase in the costs of dividends tax or CT make this scenario unfavourable to me? There used to be 19% CT and zero dividends tax making this scenario much more favourable to the small business owner.

Apart from taking a lower income by taking a lower dividend (which is marginal because the company would still pay the same CT), what would someone in this situation do instead (besides paying into a private pension to reduce CT, but which can't be touched for 20 years and therefore cannot be considered useful personal income for the year)?

(the figures above are simplified. Of course I pay a nominal N.I. amount each year also.)

eskbanker

solidpro said:

Currently income tax & NI on someone else earning £50,000 a year is £14,555 or 25%. The general direction of travel on this tax burden is static or reducing.

As a limited company director I pay myself £12,570 in salary, £37,700 in dividends which is subject to Dividend Tax £3,255 and CT of £7,163, eqalling £10,418 or 20.7% tax. The general direction of travel on this tax burden is increasing.

At what point does an increase in the costs of dividends tax make this scenario unfavourable to me?

Surely you can just recalculate each scenario after any changes to income or taxation regime, and if/when the second net percentage exceeds the first then it's time to change?  There are too many variables to try to anticipate an exact point at which that would happen, given the number of different rates and thresholds involved....

solidpro

I get it, that one has to constantly re-evaluate, but there must be tens of thousands of small business owners using the same princples during which have seen their income shrink against increasing risks & costs and/or lower profits. Many must be trying to think ahead in what to do when this formula simply doesn't work anymore...

I think the balance changes well before parity because a salaried employee is taking far less risk than any small business owner, regardless of it being limited liability.

eskbanker

solidpro said:

I think the balance changes well before parity because a salaried employee is taking far less risk than any small business owner, regardless of it being limited liability.

But surely the comparison you're making is between the two most popular mechanisms for small businesses owners to operate (i.e. whether or not to go limited company), rather than introducing a third one of standard employment?

Phoenix72

eskbanker said:

solidpro said:

I think the balance changes well before parity because a salaried employee is taking far less risk than any small business owner, regardless of it being limited liability.

But surely the comparison you're making is between the two most popular mechanisms for small businesses owners to operate (i.e. whether or not to go limited company), rather than introducing a third one of standard employment?

Yes, I'm confused with the addition of an employee to the mix. I thought it was the merits of Ltd vs sole trader.

penners324

I'm surprised that dividend income isn't considered income. Always a strange quirk of the tax system.

Or just ensure dividend income is considered income in a private limited company situation 

Phoenix72

penners324 said:

I'm surprised that dividend income isn't considered income. Always a strange quirk of the tax system.

Or just ensure dividend income is considered income in a private limited company situation 

It is considered income.

dunstonh

(the figures above are simplified. Of course I pay a nominal N.I. amount each year also.)

You shouldn't be paying any NI.

Limited liability, pension contributions and controlling your personal taxation are the main benefits nowadays.

I'm surprised that dividend income isn't considered income. Always a strange quirk of the tax system.

That is because the income comes from profit and corporation tax has already been paid on profit.

solidpro

dunstonh said:

You shouldn't be paying any NI.

Why wouldn't I want state pension at retirement age?

dunstonh said:

That is because the income comes from profit and corporation tax has already been paid on profit.

Yes and then Osborne decided to lump another 7.5%, ontop of the corporation tax after it never being 'a thing'.

Phoenix72 said:

Yes, I'm confused with the addition of an employee to the mix. I thought it was the merits of Ltd vs sole trader.

At what point did I or anyone mention anything to do with sole trader?

People run their own businesses as limited companies for many reasons, including how it will affect your income. This question is in regard to the fact that for decades, one of the advantages to those running certain sized own businesses as limited companies is how you can take home personal income up to £50k (now) paying less tax than if you were a salaried employee, but as the margins get closer, there is increasingly one huge less advantage to running a small business as a limited company, or indeed at all, unless there are other emerging ways to draw down income in a more tax efficient manner.

eskbanker

solidpro said:

dunstonh said:
You shouldn't be paying any NI.

Why wouldn't I want state pension at retirement age?

I believe @dunstonh's point is that the norm would be to only pay enough salary out of the limited company to qualify for NI credits, without actually paying the NI:

If you have earnings above the lower earnings limit (£123 per week or £533 per month for 2024/25) but below the primary threshold (£242 per week or £1,048 per month for 2024/25) you are treated as having paid NICs without actually having to make a payment. Essentially, your NIC record is registered with contributions at nil cost to you.

https://www.litrg.org.uk/working/employment/nic-employees

solidpro said:

Phoenix72 said:
Yes, I'm confused with the addition of an employee to the mix. I thought it was the merits of Ltd vs sole trader.

At what point did I or anyone mention anything to do with sole trader?

Your OP is clearly envisaging whether or not to run your one man band as a limited company or (implicitly) as sole trader, i.e. the other obvious alternative, rather than being a salaried employee of someone else's limited company, who "is taking far less risk than any small business owner":

solidpro said:

The changing tides of managing personal income through a small limited company

Say I run my own 'one man band' as a limited company and consider it's costs, profit and loss my costs, profit and loss.

MeteredOut

I took the OPs post as pointing out the diminishing benefits of a one-man-band ltd company (PSCs) versus becoming an employee of the same client.

Many PSCs existed purely for the tax benefits (for both the client and the contractor), not because the individual was attempting to grow a business or because the client wanted a service provider (though there could also be some client benefit in how PSCs could be accounted for when compared to employees, eg CapEx v OpEx)

Which is exactly why IR35 was brought in and later expanded.  The increases in CT is also having a similar affect.