Save Tax With An Extra Company
Could directors save tax by splitting trades between more than one company? The increase to the employee’s national insurance threshold means more tax can be saved by a director using one company. But would it pay to have two companies both benefiting from lower tax? We’ll explain whether directors can save more tax with an extra company.
The Tax Rules
First we need to go over the basic tax rules.
A company pays 19% corporation tax on its net profit before tax, adjusted for some non-allowable items such as depreciation. Salaries, employer’s national insurance contributions, and employer’s pension contributions are all costs of a company, reducing its profit before tax. That means the company saves tax if it pays a salary to a director.
PAYE income tax
While a salary saves the company tax, it can cost the director tax. Everyone receives a tax-free personal allowance each tax year, currently £12,570 (2022/23). So, if a person’s income exceeds this for the tax year, the excess income will be taxed. Salaries are taxed at 20% in the basic rate (income between £12,570 and £50,270).
Employees and directors also pay employees national insurance if a salary from an employer exceeds £11,908 (average for 2022/23). The key difference between income tax and national insurance on a salary, is that the income tax threshold is per person but the national insurance threshold is per job. So two salaries of £11,000 will cost the employee income tax but not national insurance.
Employers also pay national insurance at 15.05% on a salary exceeding £9,100. However, as they are saving corporation tax at 19% on the salary, they are still saving about 4% overall.
The other way a director can usually pay themselves is with a dividend, if the director is also a shareholder of the company. A dividend is not a trading cost of the company, so it doesn’t reduce it’s net profit before tax. So a dividend doesn’t save the company tax. Everyone receives a tax-free allowance for dividends of £2,000 per tax year. This is on top of the personal allowance on all income of £12,570. Dividends received above these allowances are taxed at 8.75% in the basic rate band, then 33.75% in the higher rate band (total income exceeding £50,270).
1. One Company – Dividends Only
So, lets say a director has two trades in one company, each making a net profit before the director’s salary and before dividends of £25,000. A total profit of £50,000. The corporation tax on that will be £9,500. The director could take all of the post tax profit of £40,500 as a dividend. If the director has no other income, using up the total allowances of £14,570 results in tax of £2,269 and a net income of £38,231.
2. One Company – Salary and Dividends
As above, but the director takes £11,908 as a salary. Again, assuming there is no other income, no PAYE or employee’s NIC will be deducted. Employer’s NIC on this will be £423, leaving a net profit of £37,669. Corporation tax will be £7,157, leaving £30,512 that can be taken as a dividend. The tax on the dividend will be £2,437. This leaves the director with a net income of £39,983. £1,752 more than in scenario 1.
3. Two Companies – Salary and Dividends
Let’s split the two trades between two companies and take a salary of £11,908 from each one. No employee’s NIC is payable but income tax of £2,249 is payable on the salaries. Each company will pay Employer’s NIC of £422, leaving a net profit of £12,670 and corporation tax of £2,407. That leaves £10,263 that can be taken as dividends from each company. Tax on the dividends will be £1,621. This leaves the director with a net income of £40,472. £489 more than in scenario 2 and with the added benefit of protecting the assets of each trade from the risks of the other trade.
So it can save a director tax to put separate trades into separate companies and take a salary from each. However, the saving may be less than the extra costs associated with running an extra company. There are non-financial benefits such as protecting one trade from another and having a separate identity. So a director would have to weigh up the pros and cons of each.About Us Our Prices Instant Quote