Revenue, Tax and Remuneration

Limited Company vs. Sole Trader Tax Calculator: Lite Edition

Calculations are relevant to the - tax year and are correct as of April 5th .
  • £

The turnover of a limited company is all monies which enter the business in exchange for services and goods rendered.

A company with turnover greater than £ must register to pay VAT. VAT calculations are not provided in the Lite version of this calculator. Want access to VAT calculations for the current tax year? 1 months' usage £1.99:
  • Allowable expenses£

Allowable expenses are certain business costs which can be deducted from the company turnover before Corporation Tax is calculated.

If a business is not VAT registered, allowable expenses are inclusive of VAT. Hence, a non-VAT registered limited company will not pay corporation tax on the VAT portion of business supplies. Likewise, if you use the flat rate VAT scheme, it is normal to account for allowable expenses inclusive of VAT.

This tax calculator accounts for all input VAT at 20%. To get an approximate idea of relevant taxation as a VAT registered company, simply add 20% to your VAT exclusive allowable expenses to get a figure inclusive of VAT.

Salaries are allowable expenses for limited companies. However, for sole traders, all profits are treated as salary.

For directors of limited companies:

Remuneration and taxation differ for directors of limited companies vs. sole traders. Directors pay themselves from the business with a mixture of salary and dividends. For sole traders, business profits are equivalent to salary.

Typically the most tax effective arrangement is for a director to pay themselves their personal tax free allowance (£0) in salary, with the remainder of company profits being taken as dividends. This arrangement is used by the Lite version of this calculator. Want flexible salary and dividend entry? 1 months' usage £1.99:

What is your age?

Your age affects your personal tax free allowance.

Are you older than the state pension age?

After State Pension age sole traders and directors of limited companies no longer pay National Insurance contributions. Employer's contributions paid by a limited company continue however. If your taxable income - including the State Pension - is more than the tax-free allowances, income tax will still be due.

Are you registered as blind?

Being registered as blind adds an additional amount to your tax free allowance.

Calculate

Limited Company Calculator

Total Takehome Pay: £0

Total Tax: £0

Profits and Remuneration:

  • Gross salary (Personal Allowance adjusted for age/status): £0
  • Gross dividend (including automatic % tax credit): £0
  • Net dividend (excluding % tax credit): £0
  • Net salary after tax: £0
  • Net dividend after tax: £0
  • Turnover: £0
  • Expenses (adjusted for salary and employer's National Insurance): £0
  • Profts (turnover less expenses): £0

Taxation:

Personal Tax Free Allowance:

  • Adjusted Director's Personal Tax Free Allowance: £0

Dividend Tax:

  • Tax due on dividend income above the basic rate income tax limit of £0 at 0%: £0.
  • Tax due on dividend income above additional rate income tax limit of £0 at 0%: £0.

Director's Income Tax:

  • Income Tax below £0 at 0%: £0.
  • Income Tax between £0 and £0 at 0%: £0.
  • Income Tax over £0 at 0%: £0.

Employee's National Insurance:

  • Class 1 NI Contributions between primary threshold (£0) and upper earnings limit (£0) at 0%: £0
  • Class 1 NI Contributions above upper earnings limit of £0 at 0%: £0

Employer's National Insurance:

  • Employer's NI Contributions above secondary threshold of £0 at 0%: £0

Corporation Tax owed:

  • Corporation Tax due: £0
  • Marginal Relief due: £0
  • Final Corporation Tax: £0

Sole Trader Calculator

Total Takehome Pay: £0

Total Tax: £0

Profits and Remuneration:

  • Gross salary: £0
  • Net salary after tax: £0
  • Turnover: £0
  • Expenses: £0
  • Profts (turnover less expenses): £0

Taxation:

Personal Tax Free Allowance:

  • Adjusted Personal Tax Free Allowance: £0

Sole Trader's Income Tax:

  • Income Tax below £0 at 0%: £0.
  • Income Tax between £0 and £0 at 0%: £0.
  • Income Tax over £0 at 0%: £0.

National Insurance:

  • Class 2 NI Contributions: £0 at £0 per week.
  • Class 4 NI Contributions: £0 on £0 to £0 at 0%.
  • Class 4 NI Contributions: £0 above £0 at 0%.

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.

Reference Information

Index

Remuneration and Taxation for Sole Traders vs. Limited Companies

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. We have provided simplified online calculators to enable you to assess how much you are likely to be taxed. We have also provided basic information on Allowable Expenses and Value Added Tax.

Limited Companies

  • If you set up a Limited Company and work for it as a Director, 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. Any salary paid that exceeds the personal tax allowance will be subject to National Insurance and Income tax. National Insurance regulations mean that not only must you pay National Insurance as an employee, but the company must also pay contributions and as an employer. This effectively doubles your National Insurance contribution, although employer's contributions are a tax deductable expense with regards to Corporation tax.
  • 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 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. As long as your total remuneration is less than the basic rate income tax limit of £ this can be a simple and relatively tax efficient approach. If you wish to pay yourself more than the basic rate income tax limit then you should use the tax calculator to the left to determine the best approach for your circumstances.
  • You will need to register for Value Added Tax (VAT) if your business earns more than £. VAT will then need to be paid on all of your profits.

Sole Traders or Partners

  • One of the disadvantages of being a sole trader is that your business's income is your income. You cannot pay yourself in dividends rather than salary in order to reduce taxation as you can with a limited company.
  • 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 (if relevant) have to make Class 2 and Class 4 National Insurance contributions on these profits. Your salary is hence NOT an allowable business expense.
  • You will need to register for Value Added Tax (VAT) if your business earns more than £. VAT will then need to be paid on all of your profits.
  • You must complete a tax return at the end of each year where business profits will be added to any other income that you may have (e.g. interest on savings accounts).

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.

Allowable Expenses

Business or Corporation Taxes are payable on profits. Profits are calculated by deducting 'Allowable Expenses' from your turnover.

Allowable expenses include:

Premises

  • Rent, heating, lighting and cleaning for business premises.
  • Business rates

Staff Costs

  • Wages, salaries, and most redundancy payments
  • Staff training, relevant books and magazines.
  • Staff entertainment of £150 per head (inc. VAT) for one or more annual functions (such as a Christmas party).

Travel

  • The cost of travel and accommodation on business trips and travel between different places of work is allowable. Travel to and from work is not allowable.

Stock Costs

  • the cost of goods bought for resale and raw materials used in business.
  • replacement of small tools and protective clothing.
  • advertising and discounts allowed on sales.

Communications

  • Internet website hosting, internet connection costs telephone expenses and mobile expenses (less an adjustment for private use if applicable).
  • delivery charges, postage and stationery.

Financial

  • Accountants' fees for the preparation of annual company accounts.
  • Bank charges on business bank accounts.
  • Interest on overdrafts and loans for business purposes (excluding loans from business owners).
  • Business insurance of all kinds (excluding personal insurance for business owners).
  • VAT if the company is not registered.
  • Employer's National Insurance Contributions paid by Limited Companies
  • The hire charge aspect of hire purchases (exclusing the cash cost of the actual asset).

Miscellaneous

  • Fees paid to register a trade mark or design, or to obtain a patent (excluding cost of buying a patent from a third party where capital allowances apply).

Non allowable expenses include:

  • Personal expenses such as travel to and from work.
  • Clothes or living expenses.
  • Entertaining clients.
  • fines such as parking tickets.
  • Initial cost of 'capital assets' such as buildings, machinery, vehicles, equipment and permanent advertising signs are not allowable. Capital Allowances can be claimed on the majority of these items apart from buildings. There are separate allowances for industrial and agricultural buildings. Currently 50% of equipment purchase costs are tax free in your first year of business. After that, 25% of equipment purchase costs are tax free.

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.

Corporation Tax

When operating as a limited company, Corporation Tax is due on all profits. Profits are calculated by subtracting Allowable Expenses from turnover.

  • Corporation Tax is levied at % on amounts under £.
  • Corporation Tax on amounts between £ and £ is levied at %. If total profits are less than £, Marginal Relief is then subtracted. Marginal relief is calculated by multiplying profits between £ and £ by the marginal relief fraction ().
  • Corporation Tax on amounts above £ is levied at %.

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.

Dividend Tax

Dividends are paid on the shares of the limited company. Dividends must be paid from the profits of the business. If a company pays out more dividends than there are profits available, it is technically insolvent

Dividends are not Allowable Expenses and must hence be paid from profits after deduction of tax liabilities such as corporation tax. To alleviate double taxation (both on profits, and then again when taken as income), dividends are given an automatic tax credit of %.

The amount you actually receive is less the 10% credit, and is called the 'net dividend'. However, when a director calculates personal tax due on their dividend they must use the 'gross dividend' figure. For example, a net dividend of £4500 equates to a gross dividend of £5000.

Tax on Dividend payments is complex and it is recommended that your review the detailed Government guide on Dividend tax. However, dividend income will essentially be taxed as follows:

  • Dividend income which falls above the basic rate income tax limit of £ (plus personal tax allowance - normally £) is taxed at %.
  • Dividend income which falls above the additional rate income tax limit of £ is taxed at %.

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.

Income Tax

Income tax is paid on salaries taken by directors of limited companies, and on all the profits of a sole trader.

  • If income is less than the basic rate income tax limit of £ then, after subtraction of the tax free allowance (normally £) it is taxed at %.
  • If income is greater than the basic rate income tax limit of £ (plus personal tax allowance - normally £), it is taxed at %.
  • If income is greater than the additional rate income tax limit of £ it is taxed at %.

Note: for an indiviudal under 65 years of age the personal tax free allowance is £0 reduced by £2 for every £1 earnt over £0. This allowance is affected by age.

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.

National Insurance

Limited Companies

For directors of limited companies, National Insurance is paid on salary as an employee whilst the company pays additional National Insurance as an employer.

Employee contributions:

  • Class 1 NI Contributions are paid on income between the primary threshold (£) and the upper earnings limit (£) at %.
  • Class 1 NI Contributions on income above the upper earnings limit of £ are paid at %.

Employer contributions:

  • Employer's NI Contributions on salaries above the secondary threshold of £ are paid at %.

Sole Traders

  • When earning more than £ Class 2 NI Contributions are paid at a flat rate of £ per week.
  • Class 4 NI Contributions are paid on income between £ and £ at %.
  • Class 4 NI Contributions are paid on income above £ at %.

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.

Value Added Tax (VAT)

Registration for VAT is compulsory for businesses whose turnover is over £. You must register in 30 days of reaching this threshold. If your turnover is below £, you can register voluntarily.

Registered businesses pay VAT on most purchases. This is called input tax. Registered businesses charge VAT on the goods and services they sell. This is called output tax.

There are four types of VAT:

  1. Standard rate - currently % - applies to most services and goods.
  2. Reduced Rate of % which applies to a limited number of services and goods.
  3. Zero Rate of 0% which applies to a limited number of services and goods.
  4. Exempt Goods and Services. You pay no VAT on some exempt services and goods.

Examples of reduced, zero-rent and exempt goods and services can be found on the HMRC website.

The Flat Rate VAT Scheme

For small organisations the administrative costs involved in payment of VAT can be prohibitive. If your VAT taxable turnover is less than £ you can simplify your VAT accounting by taking advantage of the Flat-Rate Scheme.

  • With this scheme you calculate your VAT payments as a percentage of your total VAT-inclusive turnover. Although you cannot reclaim VAT on purchases (this is accounted for by the flat rate percentage) the Flat-Rate Scheme can reduce the time that you need to spend on accounting for and working out your VAT. Even though you still need to show a VAT amount on each sales invoice, you don't need to record how much VAT you charge on every sale in your accounts. Nor do you need to record the VAT you pay on every purchase.
  • The percentage flat-rate you pay is determined by the type of business you run. Rates can be found on the HM Revenue & Customs website and will be dealt with by questions in the left-hand panel.
  • If you register for the Flat Rate Scheme in your first year of VAT registration, you can take advantage of a 1% reduction in your flat rate percentage.

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.

Effects of Age on Taxation

Personal Tax Free Allowances

For an indiviudal under 65 years of age the personal tax free allowance is £0 reduced by £2 for every £1 earnt over £0.

Between 65 and 74 the tax free allowance is £0 reduced by £2 for every £1 earnt over £0.

Over 75 the tax free allowance is £0 reduced by £2 for every £1 earnt over £0.

State Pension Age and National Insurance

For men born before 6 December 1953, the current State Pension age is 65.

For women, the current State Pension age is increasing from 60 to 65 from April 2010. This affects women born on or after 6 April 1950.

State Pension age is not the same as retirement age. Retirement age is when you choose to retire, but you can still work after State Pension age. You will no longer pay National Insurance but may still be liable for income tax.

Not sure if you've passed the State Pension Age? Try this online calculator.

If you are a director working for a limited company, the company must still pay employer's National Insurance contributions even after retirement age.

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.

Provisos

This software assumes a single business owner and calculates tax on remuneration accordingly.

Some complexities of the tax system are not included. For example, the following are not allowed for:

  • The software assumes the business is not VAT registered if turnover is less than £. This may not be the case if you have voluntarily registered for VAT with lower turnover.
  • VAT input tax (VAT paid on supplies bought into the business) and VAT output tax (VAT charged to clients with goods/services) is assumed to be at 20% for all expenditure. This may well not be the case for your business.
  • The effects of pension schemes and payments (pension tax relief, contracting out of state pension etc). These can significantly affect your tax bill. Always get advice from a professional accountant.
  • Married tax allowance (requires that at least one partner was born before 6 April 1935).
  • Reduced National Insurance for married women and widows (requires the woman to have been working prior to 1977).
  • Taxable benefits such as company car schemes.

Pro-Leagle's tax calculator will give you a good rule-of-thumb measure as to whether it will be more tax efficient to operate as a limited company rather than as a sole trader. However, the calculator does not take into account the additional administrative costs of running a limited company, such as accountants' fees. Always seek professional advice before deciding on the right business structure for you.

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.