The way in which your business is taxed is dependent upon whether you operate as a Limited Company or as a Sole Trader or Partner. Pro-Leagle offer an online tax calculator and reference guide to enable you to assess how you will be taxed and for how much. This compares the tax burden of a Limited Company with that of a sole trader with equivalent income and expenses. We also provide basic information on Allowable Expenses and Value Added Tax.
Sole Traders or Partners
- As a Sole Trader or a Partner, you will be charged Income Tax on ALL of your business profits above your personal income tax allowance, regardless of whether the profits are reinvested in the business or actually taken as salary.
- Similarly you will also have to make Class 2 and Class 4 National Insurance contributions on these profits. Your salary is hence NOT an allowable business expense.
- You must complete a tax return at the end of each year. To see approximately how much tax you may be required to pay, use Pro-Leagle's tax calculator.
- If you set up a Limited Company and work for it, the Company will pay Corporation Tax on its profits and you will be taxed as an employee of the Company. The Director's gross salary is an allowable expense deducted from the company's turnover in order to calculate profits.
- A Director of a Limited Company can pay themselves via a combination of regular salary payments and Dividends on the shares they own in the company. Any salary paid that exceeds the personal tax allowance will be subject to Class 1 National Insurance and Income tax. National Insurance regulations mean that you must pay Class 1 National Insurance both as an employee and as an employer, effectively doubling your National Insurance contribution.
- Tax on Dividend payments is complex and it is recommended that your review the detailed Government guide on Dividend tax. Essentially you pay Dividend tax on personal income above the Basic Rate Income Tax Limit.
- As you will be charged income tax and both employer's and employee's Class 1 National Insurance on earnings above your personal income tax allowance, some Directors choose to take a salary equivalent to their tax free allowance and pay the remainder in Dividends. This is a simple and relatively tax efficient approach.
- To see approximately how much tax you may be required to pay, use Pro-Leagles Tax Calculator which includes dividend tax calculations.
This material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.