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Sam, Accountant
Category: Tax
Satisfied Customers: 14165
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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I work full time and earn £42,000 per annum, my husband around

Customer Question

I work full time and earn £42,000 per annum, my husband around the same. I am going to be setting up a Ltd company in addition to my full time role and was looking for some advice regarding structuring the company around Directors/Shareholders in order to be most tax efficient? Many thanks, Claire
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
HI Claire
Thanks for your question
Can you advise as to what trade will be operating through this limited company and what your aims are, will it just be you that operates as director pr will there be other directors - as there are various tax efficient ways to proceed.
Are you going to need to draw on profits throughout the year as in a salary - will this need to be regular or could you manage with a one off large payment and smaller ones through the year.
Customer: replied 2 years ago.

Hi Sam,

It's going to be a bridal accessories boutique, and essentially I am the owner/operator so there isn't anyone else 'invested' in the business.

I could manage with a one off payment and smaller ones throughout the year, this may change in a year or two depending on the success of the business.

Many Thanks


Expert:  Sam replied 2 years ago.
Hi Claire
Thanks for your response and the additional information
Then your limited company will see you being director and sole shareholder and you will by law have to draw a salary each month from the business but you can keep this below the National Insurance threshold - which will then only need to be £5824 a year so there is no Employer OR Employee National Insurance, but of course this salary will be subject to tax as for tax purposes all income is added together (unlike National Insurance where each source of income is reviewed independently)
This will then mean that this £5824 will be subjected mostly to 40% tax (as your salary of £42,000 uses up most of the 20% rate band) but then you can arrange to draw the rest out as dividends.
The rule with dividends is you can only take out what there is available after your corporation tax for the year has been covered, and if you say had £10,000 left over (although please do note that this is more complex and the timings of drawing dividends is crucial but this is merely to give you an over view !) then from the £10,000 you could take out the net dividend of £9000 (which is £10,000 gross with net dividend of £9090 and tax credit suffered of £1000) and would need to leave the £1000 in the company.
And from HMRCs point of view - dividends are taxed at a much lower rate than income - so
The £9000 you take - has already been subjected to 10% tax (the tax credit retained in the company) and due to your higher rate status of 40% - the dividend is then only treated as being liable at 32.5% of which 10% was suffered at source( left in the company) so you suffer only a further 22.5% rather than 30% (difference between the income tax rate and 10% tax suffered) so suffer just a further 22.5% on the gross dividend of £10000 = £2200 further tax to pay (and NO national Insurance)
Basically a saving of £800 per £10,000 drawn this way
Of course if you then hit to a combined income position of £121200 then you do lose your personal allowances and a combined income of £150,000 plus sees 50% tax coming into consideration.
But you can also chose not to draw anything from the company at all - so that IF business takes off and you give up the full time job, then you can fully utilise future year personal allowances and 20% rate band.
One final factor - salary/wages you draw from the company ARE treated as an allowable business expense (which is deducted from profits along with all other running costs) whereas dividends are not (which is why you can only draw them after the corporation tax has been considered)
Which means that as the money drawn has been subjected already to corporation tax - that there are no real savings to be made at all !
But many accountants will encourage you to be a limited company on this basis, on which the accountancy costs are high if you would need to have assistance with the many obligations that arise.
Do therefore consider being just a sole trader - it means all income after allowable expenses are taken into account is considered for Tax and National Insurance (if over National Insurance self employed thresholds) but its more manageable with your HMRC obligations without the costly accountant, but if you chose to engage representation is also is not expensive to do so!
Let me know if I can be of any further assistance