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.
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!