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Save Tax and National Insurance with your limited company guide to saving tax and national insurance with a limited company 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

Tax saving calculator powered by Companies Made Simple – The simplest company formation service.

The above calculation presumes that all the company profits are paid to the owner each year. By taking professional advice on planning when you take your dividends you could make the tax savings even higher.

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 typically be paying tax and national insurance at a combined rate of 42% rising to 47% if income is over £150,000.

Companies pay National Insurance on wages at 13.8% (over £7,696 pa for the 2013/14 tax year) and if the director is paid a low salary (between £7,700 and £9,440) and no benefits in kind, then the company will have a 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).

Typically a director is paid a salary of £7,680 (£640 per month for 2013/14) which means that no NIC is payable and leaves the remainder of their personal allowance available to be used against bank interest or have an increased company dividend.

Limited companies currently pay tax at rates as low as 20%.

By running the business through a limited company it is possible to have a rate as low as 16.6% on profits of £45,000 by mixing your income from the company as a combination of low salary and dividends.

Dividends can only be paid out of the company’s after tax profits i.e. a maximum of 80% of the pre-tax profit (after deducting salaries and all other costs), 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 and prepare all the dividend documentation. Our clients who use our 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.

Please contact us for further information.

Please note that this article and the above calculator 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

609 usingacompanytosavetax thumb Save Tax and National Insurance with your 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.
This book is an essential read if you want to understand more about how the tax and NI savings are achieved.

602 salaryversusdividends thumb Save Tax and National Insurance with your limited company

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.

[Guide updated September 2013]