For the smaller business there have been a lot of changes over the last few years in how business profits are taxed. In particular for small limited companies as the dividend tax credit has gone and been replaced by a dividend tax.
What are the changes coming up?
From April 2018
- Class 2 National Insurance contributions paid by the self-employed are abolished. Class 4 National Insurance contributions will give the self-employed access to contributory benefits, previously only enjoyed by the employed.
- The reduction of the tax-free dividend allowance from £5000 to £2000.
From April 2020
- A planned reduction in corporation tax rates from 19% (from 1 April 2017) to 17%.
What are the reasons for trading as a limited company?
The main tax benefits have been removed but a limited company still limits any liability if something goes wrong. Your house and car, and all your other assets, provided you own them and not the company, are safe.
A limited company may make you look larger or more professional and if you want to gain business from other big businesses and combined with a VAT registration, gives an impression of size and security.
What are the reasons for trading as self-employed?
It is easy to set-up your business. You just find a customer and off you go!
You will need to register with HMRC and complete income tax self assessment returns but that’s it. It is also equally easy to stop trading, include the date your trade finished in your tax return and pay your last supplier invoices, collect your last customer receipts and you are done.
Just remember you don’t have limited liability so depending on what your business does it is nearly always advisable to have some business insurance – remember it is you that is trading and so you would be the person sued should everything go wrong.
What about the tax situation?
Taking into consideration the changes detailed above and also assuming that: allowances stay the same; the owner of the company takes a low salary (equal to the class 1 NIC primary threshold); and all the profits are taken by the owner as dividends, THEN these are the tax benefits in working through a limited company at different profit levels over the next few years.
| Year | Profit
£20,000 |
£30,000 |
£40,000 |
£50,000 |
£60,000 |
| 2015-16 | £712 | £1,612 | £2,512 | £3,737 | £3,937 |
| 2016-17 | £511 | £811 | £1,111 | £2,321 | £2,268 |
| 2017-18 | £571 | £963 | £1,356 | £2,398 | £2,803 |
| 2018-19 | £198 | £590 | £983 | £2,025 | £2,430 |
| 2019-20 | £198 | £590 | £983 | £2,025 | £2,430 |
| 2020-21 | £417 | £994 | £1,572 | £2,799 | £3,130 |
Should you change from self-employed to limited or the reverse from limited to self-employed?
If you are a contractor, you will have to work through a limited company (or umbrella) as your client and agency will insist.
If you run your own freelance business you have a choice and there are other factors to take into consideration, such as: do you want to involve your family? Will you want to take all the profit out of the company as dividends? Do you need the limited liability protection? and do you want the extra administration of running a company?
If you need help with this decision, then please contact us to take advantage of the 30 minute free consultation.