Ltd Company tax question

[MassiveJim]

I work for a company that employees a number of contractors.
I have on occasion spoken to the contractors about pay etc, and a few have said that they have set themselves up as a ltd company as they pay less tax.

I can't get my head around this however.
If they were just normal contracted agency workers on PAYE, they would get there 11,000ish tax free allowance then pay 20% (plus 12% NI) on the balance of the money they earn (unlikely that any of them earn enough to step in to the 40% bracket)

As a ltd company, as I understand it, they can pay themselves 11,000 as an employee,
then (and this is the bit I am not sure on)
they pay 19% on any profit they make, then 7.5% tax on any dividends they take out.

To me this appears to be a saving of around 6% ish.
Hardly the huge savings they talk about, especially as one of them told me the accountant costs, which I can't now remember but seemed very high (something like £250 per quarter)


Is the above correct or am I missing something ?

 

[VincentHanna]

Well you get £2500 tax free allowance on dividends, and it used to be £5000 so there's an extra saving.

 

[GSXRMovistar]

You are also not factoring in that your expense base (equipment, travel, subsidence, pension, software/subscriptions...etc, etc) comes out of your pre-taxed profit.

 

[Greebo]

6% ish for low tax payers, it becomes 10% for higher tax payers.

Biggest difference between being on the books and getting paid through PAYE will be the business expenses you can claim for. As a limited company their travel to work from home everyday can be put through as a legitimate business expense unlike when they are an employee. Same with their clothes and tools. Same with lunches and coffees and stuff. Its a much more lenient regime as a business and their taxable profit will be a lot less than being paid directly through PAYE. I am pretty sure a typical contractor could lose up to £10,000 per annum of their taxable profits with no issues.

Being VAT registered can bring even more benefits. WHen my other half was self employed she registered for VAT on the flat rate scheme which gave an extra 1% as a first year bonus so she was 3-4% better off that way.

 

[VincentHanna]

Also married couples could both be directors of a ltd company, so the tax allowance can be split even further between them.

 

[booyaka]

loads of reason to do it - but it's not the panacea that everyone thinks it is.

 

[Maccapacca]

It's not all gravy as my accountant would say. It's more of a sophisticated jus.

 

[MassiveJim]

So it is lots of little benefits added up to make up the bigger picture. Makes sense I guess

A question regarding pension then, what is the maximum you could get away with paying yourself from your own income as well as company contribution on a 11,000 (or whatever you increase it to, in order to negate the pension payment) ?

 

[Mark M]

£40k, typically*

Edit - * T&C's apply.

 

[alx]

Typically contractors have higher gross earnings vs PAYE staff which is another consideration in this equation.

In reality PAYE vs Ltd company contractor isn't always a direct comparison as they both have their pros and cons, companies use the employees in different ways and the setups suit different people depending how they like to work and the industry they work in.

 

[Bluecube]

On a slight tangent, how are there benefits in registering for VAT? I’m self employed and am dreading hitting the VAT threshold as I have relatively few outgoings compared to income. It just seems that suddenly I’ll be hit with an additional 20% tax.

 

[Maccy]

On a slight tangent, how are there benefits in registering for VAT? I’m self employed and am dreading hitting the VAT threshold as I have relatively few outgoings compared to income. It just seems that suddenly I’ll be hit with an additional 20% tax.

You charge VAT on top on your invoices, in your first year you only pay 15.5% back to the government and then 16.5% onwards - therefore there's extra money you're gaining by charging VAT. It's only beneficial if your ltd company is turning over >£85,000/annum I think though.

 

[Bluecube]

You charge VAT on top on your invoices, in your first year you only pay 15.5% back to the government and then 16.5% onwards - therefore there's extra money you're gaining by charging VAT. It's only beneficial if your ltd company is turning over >£85,000/annum I think though.

That’s the problem. I run a small residential cleaning company. There’s no way that my non commercial customers would accept a 20% price hike.

The 85k figure isn’t about whether you’ll benefit or not. That’s the point when you must legally inform HMRC that you’re above the VAT threshold and start ponying up.

 

[Raymond Lin]

That’s the problem. I run a small residential cleaning company. There’s no way that my non commercial customers would accept a 20% price hike.

The 85k figure isn’t about whether you’ll benefit or not. That’s the point when you must legally inform HMRC that you’re above the VAT threshold and start ponying up.

Find ways to spend it...time for a company car?

 

[Maccy]

That’s the problem. I run a small residential cleaning company. There’s no way that my non commercial customers would accept a 20% price hike.

The 85k figure isn’t about whether you’ll benefit or not. That’s the point when you must legally inform HMRC that you’re above the VAT threshold and start ponying up.

I can't remember the exact threshold, my accountant told me when I was first starting out that it would be beneficial when earning over X amount.

Worth reading through this though - https://www.freeagent.com/guides/vat/flat-rate-scheme/

And don't buy a company car unless a) you do mega miles and/or b) it's electric/zero emissions. Generally the BIK tax outweighs the savings.

 

[Maccapacca]

VAT threshold is on income regardless of cost.

A company generally pass through the VAT, it's only the private customer or end user that suffers the cost of the VAT unless you're putting your prices up to cover it then it'll cost you.

 

[EyeDot]

You charge VAT on top on your invoices, in your first year you only pay 15.5% back to the government and then 16.5% onwards - therefore there's extra money you're gaining by charging VAT. It's only beneficial if your ltd company is turning over >£85,000/annum I think though.

Incorrectly portrayed.

As a cleaner he charges 20%, and pays back 11% (1% discount first year) then 12% the following years, of the TOTAL amount (including VAT) not the Net amount.

ie

£10,000 bill.
He charges £12,000 to the client (£10,000 plus £2,000 VAT)
He then pays 11% of the £12,000 (£1,320) to HMRC and pockets £680 profit on the VAT (minus the cost of paying his accountant)

List of the VAT rates here.

You'll also have to leave the scheme if you exceed £230,000 turnover.
There are also new hurdles you have to pass around being a "limited cost business" which your accountant can help you with.

 

[Bar]

There are very little benefits these days for typical contractors being LTD. The financial benefits get smaller every year and depending on what you are doing and how many customers you have there is the risk of IR35. The flat rate VAT is virtually pointless as you make about £10 in every £10k it really is miniscule.

As a contractor through a limited company you need to organise your own pension and make provisions for times you cant work (sickness / holiday / out of contract). There are still some benefits, but they are nowhere near what they used to be compared to 10 years ago.

 

[GSXRMovistar]

Currently on the flat rate VAT scheme and agree it almost pointless now, used to be a nice little earner but not so much these days making just £26 for every £1K you charge.

 

[Jokester]

There are very little benefits these days for typical contractors being LTD. The financial benefits get smaller every year and depending on what you are doing and how many customers you have there is the risk of IR35. The flat rate VAT is virtually pointless as you make about £10 in every £10k it really is miniscule.

As a contractor through a limited company you need to organise your own pension and make provisions for times you cant work (sickness / holiday / out of contract). There are still some benefits, but they are nowhere near what they used to be compared to 10 years ago.

Yep. The primary benefit these days, now that dividend tax/allowances and flat rate VAT have been changed is that you basically will just earn more than someone PAYE and have the flexibility to manage your own time off and pension contributions.