Save Tax and National Insurance with your limited company

It is possible to reduce your (UK) personal tax and national insurance by running your business via a limited company.

The amount of tax and NI you can save will depend upon several factors including the company’s profitability, your personal circumstances and the amount of funds you wish to withdraw from the business.

At HRBS we regularly monitor our client’s businesses and suggest methods of reducing their tax liabilities, including whether incorporation (becoming a limited company) would be worthwhile considering in order to minimise tax and National Insurance.

Calculate how much tax and National Insurance you could save

Download our excel spreadsheet to calculate how much tax and National Insurance you could save by running your business via a limited company. The spreadsheet uses the 2009/10 tax and National Insurance rates to help you plan your tax situation for the next tax year.

Why tax and National Insurance savings are possible

Sole traders (and partners in a partnership) are currently taxed on their profits whether or not they withdraw them from the business. Depending upon their profitability and other income they could be paying tax and national insurance at a combined rate of 41%.

Companies pay National Insurance on wages at 12.8% (over £5,715 pa) and if the director is paid a low salary (between £5,715 and £6,475) and no benefits in kind, then the company will have a very small company National Insurance charge. This level of salary uses the director’s personal allowances so the company receives a tax deduction for the salary and the director pays no tax (assuming no other earned income).

Limited companies currently pay tax at rates as low as 21%.

By running the business through a limited company it is possible to have a rate as low as 18.3% on profits of £45,000 by mixing your income from the company as a combination of low salary and dividends. Download our excel spreadsheet to calculate your combined tax/NationaI Insurance rate.

Dividends can only be paid out of the company’s after tax profits i.e. a maximum of 79% of the pre-tax profit, otherwise they will be illegal under Company Law and HM Revenue & Customs may treat them as loans/salary with adverse tax consequences.

It is recommended that your accountant checks over the figures before a dividend is declared and paid. As part of our service at HRBS we prepare draft management accounts to calculate the amount of dividend available. Our clients who use our free online accounting software are able to calculate their company’s profitability and dividend available at any time during the year.

Other things to consider.

There are many other issues to be considered when choosing whether to trade as a sole trader or limited company, including legal and commercial, as well as the additional administrative requirements. HRBS are specialists in helping new and developing businesses and are able to provide expertise and guidance to assist you, leaving you free to concentrate on running your business.

Download our excel spreadsheet to calculate how much tax and National Insurance you could save by running your business via a limited company.

It is straight forward to use and you only need to input a maximum of 4 items:

Expected annual profit (max £300k)
Salary required (recommended approx £6,400, the higher the salary the lower the National Insurance savings)
Whether you wish to only pay basic rate tax on your income (choose Yes/No).

If No, input the amount of dividend you wish to take up to the maximum shown as available.

There are no macros in the spreadsheet, calculations are based on data contained within hidden sheets.

Please contact us for further information.

Please note that this article and spreadsheet have been provided for illustration purposes only and do not constitute financial nor legal advice.

Taxcafe have some great, plain English guides to the potential tax benefits of using a limited company

	Using A Company To Save Tax Contains all the information you will ever need on the tax benefits and drawbacks of running your business through a limited company. Click here for more details.
	Salary versus Dividends An essential guide for company directors and shareholders, this guide shows how to potentially save thousands by choosing the right mix of salary, bonus and dividends. Click here for more details.

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