Should you become a limited company if you are already a higher rate tax payer…

Author: Russell Smith
August 27, 2015

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%

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