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You can increase you income by 10% if you register for VAT & further 10% increase if you register a Company

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How it works?

If you are self-employed with net profit equal or higher than £20,000, you end up paying twice as much taxes as you would pay, if you were to incorporate your business (i.e. form a Limited Company)! 

Here are simply illustrations of the differences in tax regime between self employed and limited companies:

Taxation of limited companies

Under the company tax system companies pay tax of 20% on profits up to £300,000 a year, a company’s post-tax profit can then be paid to its shareholders as a dividend which is free of further tax whilst the shareholder’s gross annual income remains below £41,866. After this a higher rate charge equivalent to 25% applies to the amount of income exceeding £41,866. Let’s consider a company with an annual profit of £

Income after allowable expenses £50,000
Less: Salary to owner/director £7,950
Net profit subject to tax £42,050
Less: Corporation tax payable £8,410
Net profit that can be paid to the shareholder as a dividend £33,640
Salary that is paid tax free (covered by personal allowances) £7,950
Take-home pay £41,590
Percentage of net income to gross income 83%


Taxation of self employed and partnerships

Sole traders (self employed) and partners pay Income Tax of 20% and Class 4 National Insurance of up to 9% on profits between £153 and £805 per week. Again where gross income exceeds £41,865 per annum a higher rate charge equivalent to a further 20% applies and a flat rate Class 4 National Insurance charge is made of 2% of income exceeding £805 per week. Let’s consider a sole trader or a partner with a profit of £50,000

Income after allowable expenses £50,000
Less: income tax £9,627
Class 2 Nat Ins -£2.75 pw £143
Class 4 Nat Ins – Standard £3,052
Class 4 Nat Ins – Higher £163
Total tax and National insurance £12,985
Take-home pay £37,015
Percentage of net income to gross income 74%


So in this example the limited company structure gives a tax saving of £4,575 and increases take-home pay by over £381 per month.

The examples above all assume that the sole trader or director/shareholder has no other income. If you do have other income such as a pension, a second job or a rental property then it is likely that the impact on both the limited company and sole trade model with be broadly the same. This means that the general rule of thumb that operating via a limited company should save you tax will hold true.

Additionally, it could be sensible to pay your spouse, partner or other family members a wage from your business or indeed you might want to let them have a shareholding in your company.

How to become a limited company 

Table below demonstrates exactly how much extra CASH you will have once you register a limited company:

Gross Annual Salary Tax paid as Self employed Tax paid as Company Extra CASH home
£20,000 £3,227 £2,410 £817
£25,000 £4,677 £3,410 £1,267
£30,000 £6,127 £4,410 £1,717
£35,000 £7,577 £5,410 £2,167
£40,000 £9,027 £6,410 £2,617
£45,000 £11,104 £7,410 £3,694
£50,000 £12,985 £8,410 £4,575
£55,000 £15,085 £9,410 £5,675