Should I switch to a limited company? This is a question accountants often hear. Well, use the calculator below to see how much ‘take home’ money you would be left with, if you had a company (and took dividends), as compared to being self employed, or purely employed.
Tax includes all forms of taxation, income tax, corporation tax, and national insurance. Figures are based on rates for the year to 5th April 2013.
The figures assume the basic personal allowance applies, as reduced when income exceeds £100,000. ie no age allowance/blind persons allowance
The figures for the ‘Dividend’ option include a salary of £8,100. Where profit is modest this saves tax, as it is covered by the personal allowance. However, when income is above £100,000 then £1 of the personal allowance is lost for every £2 of income. So at an income of £114,950 there is no tax saving on the salary. There is in fact a small financial cost, as a small amount of national insurance is payable.
The figures assume all profits are taken in personal income. With a limited company, there is no requirement to do this. Leaving funds in the company saves tax, and this is particularly advantageous when a company is growing and requires finance.
There are considerations besides the above tax comparison to take into account. For example, if you have a large expensive car, and do a high business mileage, then much more tax will be paid if this car is in a limited company when compared to a self employed business. Also bear in mind that administrative costs will be higher for a limited company.
If there is a chance you may in the future sell your business, bear in mind that the buyer may not want to purchase your limited company. If the company has to sell its assets (goodwill, fixtures etc), it is likely more tax will be payable than if you had retained the business as a sole trader or partnership.
A limited company does give the advantage of limited liability.
In the March 2011 Budget the Government announced an intention to combine tax and national insurance. This is a long term intention, which in the midst of difficult economic times seems unlikely. It does mean that the above figures may change radically in the long term.