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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15946
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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If I earn £18,000 a year self employed, am I better off becoming

Customer Question

If I earn £18,000 a year self employed, am I better off becoming a LTD Company?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

If you make a profit of £18,000 on a self-employed basis, the first £10,000 will be covered by the personal allowance and you will pay income tax at 20% on £8,000 which is £1,600.00. You will also pay Class 4 NIC of £903.96 (£18,000 - £7,956 x 9%) and Class 2 NIC of £143 (£2.75 x 52 weeks). Therefore, your total tax and NIC liability will be £2,646.96.

If you have a company which makes a profit of £18,000, it will pay corporation tax at 20% of £3,600. You will then have to find a way to withdraw income in a tax efficient manner. If you take dividends, they are treated as basic rate tax paid and you will have no further tax to pay so long as your personal income doesn't exceed around £42,000.

There are compliance costs associated with a limited company. You would need to be looking at a significantly higher profit to make a company worthwhile from a tax and NIC perspective.

I hope this helps but let me know if you have any further questions.

TonyTax and other Tax Specialists are ready to help you
Expert:  TonyTax replied 2 years ago.
Thanks for accepting my answer.

You could reduce your corporation tax liability by paying yourself a small salary and taking the balance of your income in the form of dividend but at a low profit level the compliance costs will probably outweigh the tax savings.

Try plugging some figures into the calculator here to get a feel for the potential savings at higher profit levels.