Starting a new business? Get 40% off our accountancy services for 3 months! 😀

x

Although being a sole trader is the most popular way to run a business in the UK, there are a number of advantages to forming a limited company. One of these advantages is to do with tax efficiency.

Why might a limited company be more tax efficient?

Company directors can pay themselves a small salary, pitched so that it’s liable to minimum income tax and no National Insurance Contributions. Very often, the salary will be covered by the tax free personal allowances which all UK residents are entitled to.

Their additional income can be paid through dividends. These are not subject to National Insurance Contributions, and are taxed separately.

 

Dividends are taxable as investment income, although tax rates for dividends are typically lower than rates of income tax. The tax rate depends on the amount of overall taxable income received during the year, whether you are a basic rate taxpayer or pay tax at the higher rate.

A sole trader is taxed and pays National Insurance Contributions on all of their after-tax and expenses profits.

Is a limited company complicated to set up?

The formation of a limited company is more complex than setting up as a sole trader, but an accountant can help you get started. We also have a guide to incorporating a limited company, so you know what to expect.

 

accounting services for limited companies

Is there a lot of work involved to pay dividends?

Dividends are often paid at the end of the year, when the final accounts show the year’s profit. The dividend amount must be agreed with formal meeting minutes – even if you’re the only director or shareholder in the business!

A dividend voucher is issued as evidence of dividends paid. This is so that the directors or shareholder can use it to complete their self assessment tax return. To make things easier, we’ve created a template for director’s minutes and dividend vouchers.

You will need to declare your dividend income on your Self Assessment tax return each year.

Our online accountants can help you with your tax return. Talk to an advisor by calling 020 3355 4047, or get an instant quote online.

About The Author

Kara Copple

An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.

More posts by this author
guest
0 Comments
Inline Feedbacks
View all comments

Read more posts...

Get Ready for Small Business Saturday UK 2022

Small Business Saturday started in the US in 2010, on the first Saturday following Thanksgiving. It aims to encourage shoppers to consider…

Read More

Architects and Tax

Architecture is a highly diverse sector when it comes to tax. It’s partly down to the type of businesses that carry out…

Read More

June 2022 Client of the Month: Manea Kella

This month we spoke to Adrian Manea, architect and director at Manea Kella, a London based RIBA Chartered architecture and interior design…

Read More
Back to Blog...

Confirm Transactions

The number of monthly transactions you have entered based on your turnover seem high. A transaction is one bookkeeping entry such as a sale, purchase, payment or receipt. Are you sure this is correct?

Yes, submit my quote
No, let me change it

Please contact our sales team if you’re unsure

VAT Returns

It is unlikely you will need this service, unless you are voluntarily registered for VAT.

Are you sure this is correct?

Yes, the business is VAT registered
No, let me change it

Call us on 020 3355 4047 if you’re not sure.

Bookkeeping

You only need this service if you want us to complete the bookkeeping on your behalf.

Would you prefer to complete your own bookkeeping?

Yes
No

Call us on 020 3355 4047 if you’re not sure.