According to the latest data, there are around 1.4 million limited companies currently trading in the UK.
When you form a limited company you are creating something totally new that is yours to develop and grow. Becoming a limited company can also have significant financial advantages. In our guide, we look at how you can save tax by becoming a limited company. Keep reading to learn more.
52 Ways to Save Tax – Part 18 : Become a Limited Company
Private limited companies are privately owned businesses and are often referred to as a ‘limited company’. There are over 1 million limited companies in the UK, and, at the start of 2011, 56.5 per cent of these had employees. A limited company is:
- Owned by its shareholders and run by its directors – if you set up your own limited company you are both a director and shareholder
- A legal entity in its own right – the business has its own rights and obligations. For example, any profits and losses belong to the company and so it can continue regardless of the death, resignation or bankruptcy of any directors or shareholders
- Registered at Companies House – your limited company will be registered and information about it will be available to the public
- Governed by its own articles of association – these are the internal rules by which your company will be managed. Every limited company must have articles of association by law and all members of the company must adhere to these rules
- Offers limited liability – this means the company is liable for its debts and the shareholders and directors are not personally liable
Choosing to become a limited company
Deciding to operate your business as a limited company is a big decision. There are lots of legal technicalities and ongoing administrative requirements in addition to the day-to-day responsibilities of running your company and generating a profit.
However, choosing to become a limited company can have many financial advantages. Firstly, as a director and shareholder of a limited company you can elect to take the majority of your income in the form of dividends rather than as a salary.
This enables you to manage your own tax liability and potentially save on National Insurance costs.
From April 2016, the first £5,000 of dividend income that you receive in each tax year will be tax-free. Sums above that will be taxed at 7.5 per cent for basic-rate taxpayers, 32.5 per cent for higher-rate taxpayers and 38.1 per cent for additional-rate taxpayers. You must use self-assessment to pay any tax due.
Bear in mind that dividend income is still eligible for the personal allowance. So if next year you had £15,000 in dividend income, the first £11,000 would be covered by the personal allowance and the other £4,000 by the new dividend allowance. As a result, you would pay no tax.
As a Limited Company the only person you have to pay is yourself. Combined with the tax efficiencies on offer, this means you can keep anything from 81 to 86 per cent of the profits that you make.