A Limited Company is a legal entity in its own right that is owned by a shareholder(s) and ran by a director(s). Because it is a legal entity in its own right the shareholder(s) enjoys limited liability which generally means they are not liable for liabilities of the company. A limited company must have at least one shareholder and one director. The company shareholder(s) can also be the director(s).
Companies currently pay corporation tax on taxable profits at 19%. The company can pay out distributable profits as dividends (currently free from National Insurance) which are subject to income tax on the shareholder(s). In addition to dividends being free from National Insurance there is also a £2,000 tax-free dividend allowance.
The shareholder(s) is only taxed on dividends voted and paid by the company. Therefore, this leaves the option to retain profits in the company, which can potentially be distributed on cessation of the company as a capital distribution as opposed to dividend income. There are strict rules governing this, but the tax savings can be huge given dividends are potentially taxable at 38.1% whereas the rate of capital gains can be as low as 10%.
Trading via your own company means a lower earning spouse or civil partner could subscribe for shares in the company. A non-earning spouse could also receive a salary in order to utilise their tax-free personal allowance.
As a basic rate taxpayer (total income up to £50,000), the tax rate on dividends is currently 7.5%. Combined with there being no National Insurance on dividends means potentially saving £000’s in tax and National Insurance.
Tax savings could be further maximised if current total income exceeds £100,000 due to your tax-free personal allowance between restricted for taxable income between £100,000 and £125,000, being lost completely for taxable income over £125,000.
We do all the work for you, from setting up the limited company, dealing with the company’s annual reporting obligations to Companies House, dealing with HMRC regarding all company matters, appointing directors, issuing shares, preparing board minutes and dividend vouchers, and dealing with the monthly company payroll.
Tax savings are possible no matter what your circumstances, contact us now to find out how much you could save: jason@doctorstax.co.uk