This is an interesting question…
You already earn over £43,000 employed income so you are a higher rate tax payer. You earn some private income that you know you need to declare but you are not sure whether to declare as a self employed individual or a limited company.
You know that the self employed individual tax rate is 40% tax and 2% Class 4 National Insurance and you know that the limited company tax rate is 20% and the dividend tax rate at the higher rate is 25%.
So on the face of it, the limited company tax is 45% compared to 42% for sole traders.
Actually no!
The dividend is from after tax profits and the effective rate of this is 20% tax which means that it is 40% tax in the limited company and 42% tax as a self employed individual. For example, a limited company with £20,000 profits.
Profits – £20,000
Corporation tax 20% – £4,000
Profits after tax – available for dividends – £16,000
Tax on dividends – 25% – £4,000
Total tax – £8,000
Tax as a % of profits – 40%
