Advantages of a private limited company
The main advantages of a private limited company or a Limited Liability Partnership (LLP) is the protection from unlimited liability in the event you can’t pay your creditors, and the tax advantages of a private limited company.
We’re going to concentrate here on just the main tax advantages of a private limited company:
- Small Private Limited Companies (that’s with profits up to £300,000) pay corporation tax at 20% on all of their profits but individuals (sole traders and partners) pay tax at a range of rates from 0% to an effective top rate of 47% (including national insurance), on different slices of their income. So, it’s possible to pay less in tax by working through a private limited company, but it does depend on the level of your total income and hence the total tax you would pay as an individual.
- If you have £30,000 of profits liable to 40% tax and 2% NI (meaning your total income is about £72,000), the tax & NI saving can be £30,000 x 22% =£6,600 every year on this alone.
- Sole traders and partners pay Class 2 & Class 4 National Insurance on all of their profits, but Private Limited Companies only pay national insurance on salaries and benefits paid to the employees and directors. For someone earning £30,000 in a year, the amount of class 2 and Class 4 NI to be saved is just over £2,000.
- You can get tax advantages of a private limited company at very low profit levels as long as you do not pay all of the net profits out of the company as salary and benefits.
Is there a catch? Possibly:
- There are additional costs involved in running a private limited company such as more administration and higher accountancy fees. Although we only charge from £50pm for companies. Click here to see our fixed accountancy fees.
- With a Private Limited Company you have to consider how much money you want to take out of it and pay to yourself. But this flexibility can be used to your advantage.
- When you take money out it gets taxed on you personally. The two main ways to take money out are either as a dividend or as a salary and we’ll compare them more in another post, but we’re are going to assume dividends are being used as these are normally the most beneficial to small business owners.
- Assuming you can use dividends, you don’t pay any tax on these up to your 40% tax band of £41,450 but you pay 22.5% of the gross dividend above this amount (and 32.5% for those in the 45% rate tax band). If you add this to the 20% your company is paying, it then doesn’t look so great.
- However, if you are happy to only take income out up to the basic rate band threshold (£41,450) and leave the excess profits in the company you can pay far less tax. This means Private Limited Companies can work for people making good profits who want to reinvest the profits of their business above £41,450 into the business, or are possibly happy to leave the profits in their company until a later year when they are making less, and take the money out then.
- Property Developers are one trade where this is often the reason to leave the profits in the company, to buy the next property.
- If you want to get your hands on all the money your Limited Company makes straight away, the advantages of a private limited company aren’t that great.
How we can help you
We can calculate how much you could save by trading as a company. We offer a free incorporation service to our clients to help them benefit from the advantages of a private limited company. Our accounts and tax fees for companies start at just £50pcm. Use the buttons below for more details.