Freelance work - tax question

[TheMagicPirate]

To look cool I guess.

Normally when you fill in you tax forms your 'company name' will just be your name as you are a sole trader.

I suspect a lot of people set up their own companies purely for advertising reasons. I personally make all my self-employed money doing monkey work for a radio station so being a 'sole trader' is fine for me. Once I graduate however I will be setting up my own company for when I enter the world of work.

 

[csmager]

I accept that the grammar, and morality of the post may have been wrong but the facts are indeed correct.

Part Correct - you seem to be muddled between tax and NIC. You could earn £100k at HMV and £2k as self employed, and you would pay no NIC contribution on your £2k. You'd most definitely pay tax on it.

Then why do so many freelancers set up their own companies?

There are some tax advantages to doing it this way. Has to be offset against the fairly large administrative effort in doing it.

 

[Stolly]

Then why do so many freelancers set up their own companies?

It can be more tax efficient.

For instance, my income gets paid to my Ltd, and then i can derive my personal income from the Ltd. I pay 20% corporation tax on that, and then i can claim mileage to my customer from the company which is tax free. 40p a mile soon adds up

 

[Stolly]

Part Correct - you seem to be muddled between tax and NIC. You could earn £100k at HMV and £2k as self employed, and you would pay no NIC contribution on your £2k. You'd most definitely pay tax on it.


There are some tax advantages to doing it this way. Has to be offset against the fairly large administrative effort in doing it.

You can pay an accountant to do most of the paper pushing. My Ltd takes around 2 hours a week of my own time, plus the £100 or so i pay the accountant.

Edit ****

£100 a month that is, not week.

 

[Coran]

You can charge petrol and a few other bills to the Ltd as company costs thus reducing overall profit and paying less tax.

 

[Guv]

All those epenses being talked about offsetting against company income can be offset if you're a soletrader as well, you don't need to own a Ltd company.

The tax savings of using a limited company are good if your earnings are usually below the higher rate band as you'll pay corporation tax of 20% (soon to be 21%) on company PBT and as long as the dividends you receive from the company are less than the higher rate band there is no income tax to pay.
Once you hit the higher rate band you'll pay 25% income tax on the net dividend as well as the company paying corporation tax on company profits.

 

[2blue4u]

Because you Class 2 contributions are below the threshold, you therefore pay no tax on your Self-Employed earnings.

WRONG! Forget the NIC complications for now. Of course there's tax to pay on the self-employed earnings. As his tax threshold is exceeded (with his p.a.y.e. salary), all his self-employed earnings are subject to tax.

 

[csmager]

You can charge petrol and a few other bills to the Ltd as company costs thus reducing overall profit and paying less tax.

You can do that when you're self employed too.

Difference is, as Stolly mentioned, you can pay youself a nominal salary and take the rest in Dividends, which results in far less tax and NI being paid than taking it all as salary.

 

[Coran]

Funky stuff. A lot to read up on if it ever comes up in life.

 

[Stolly]

All those epenses being talked about offsetting against company income can be offset if you're a soletrader as well, you don't need to own a Ltd company.

The tax savings of using a limited company are good if your earnings are usually below the higher rate band as you'll pay corporation tax of 20% (soon to be 21%) on company PBT and as long as the dividends you receive from the company are less than the higher rate band there is no income tax to pay.
Once you hit the higher rate band you'll pay 25% income tax on the net dividend as well as the company paying corporation tax on company profits.

Really ? I've read conflicting things on this. So if the Dividends don't take my personal income over the higher rate threshold (£33,000 or thereabouts iirc) i don't pay any income tax on them ?

Thats cool if so !

 

[csmager]

Really ? I've read conflicting things on this. So if the Dividends don't take my personal income over the higher rate threshold (£33,000 or thereabouts iirc) i don't pay any income tax on them ?

Thats cool if so !

Nope - There's officially 10% tax on them, but all UK dividends to UK individuals have a notional 10% tax credit on them, hence the end result of 0%. You're not getting something for nothing though - the company is having to pay CT of at least 20/21% on its profits.

32.5% on high rate tax payers, but the 10% tax credit brings that to 25%.

Threshold for High rate this year is £34,600, which assuming a personal allowance of £5,225 actually takes it to £39,825.

 

[Guv]

Really ? I've read conflicting things on this. So if the Dividends don't take my personal income over the higher rate threshold (£33,000 or thereabouts iirc) i don't pay any income tax on them ?

Thats cool if so !

Correct, in the basic rate band dividends are taxed at 10% but you get a 10% 'tax credit' on dividends from the company so the 10% you'd pay is canceled out by the tax credit.

Example, you receive £10,000 (net)...

Dividend received (gross) (10,000 * 100/90) = £11,111

Tax on dividend = £11,111 * 10% = £1,111

Tax credit = £11,111 - £10,000 = £1,111