Tax-free benefit for entrepreneurs/self employed?

Question

One of my friends has said to me you can pau lower taxes if you set-up yourself as a business and pay yourslef dividends. How does it work exactly? Does the business have to be a sole trader, an LLC, or else? Does the company have to be onshore or offshore? and What is the real tax benefit? Thanks

Answer 1

Your business structure depends on what you do, how much money you  are likely to make, what the risks are and so on (tax is only one of the factors to consider).  

An example may be easiest.  Let us say you earn/make £20,000. As an employee you would pay £2793 tax and £1599.40 national insurance - taking home £15607.60

As a sole trader you would pay £2793 tax and £1284.80 national insurance - taking home £15922.20.

As a company you would (by using a salary of £5435 and paying out the maximum dividends) pay corporation tax of £3058.65, no income tax and no national insurance - taking home £16941.35.

Now these are NOT strictly speaking comparable - a sole trader and a company would normally use an accountant which a employee doesnt, and a company's accountancy and legal compliance costs tend to be higher than that needed by a sole trader. So to earn the same money you would need to do different amounts of work for each structure. Also as an employee you have various benefits (holiday, redundancy pay, etc) which are not available to a sole trader or to someone who runs their own company.

Answer 2

It used to be beneficial to set up a company instead of being lf-employed.  Company pays you a salary maybe up to the standard tax rate then dividends.

I believe the changes inthe last budget have made this not so beneficial.

Answer 3

When companies had £10000pa tax free it was worthwhile. Now it isn't.

There are benefits to being self employed, but you should not let the tax benefits tempt you unless you can genuinely be self employed and you're aware of the downside.

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