You may have been persuaded that it is more tax efficient to run your business through a limited company rather than as a sole trader. But it can appear as if your income is taxed twice this way.
You need to remember that the company is taxed on its profits, the director/employee is taxed on their salary and the shareholder is taxed on dividends received. It is clearer if you can visualise a much bigger company such as BT where the company itself is quite clearly separate from the individuals who work there and the shareholders (individuals and corporate investors such as pension companies) who own it.
A company pays (currently) 19% corporation tax on profits which consist of sales minus business expenses such as salaries. It also pays employer’s national insurance as a sort of tax on jobs.
The employee pays tax at 0-45% (depending on their other income) and employee’s national insurance. Directors are excluded from the requirement to pay the National Minimum Wage unless they have a contract of employment. (It’s a contract of employment which provides protection under employment law should a falling out with shareholders lead to unfair dismissal). As this salary is a business expense it reduces the corporation tax paid by the company.
Shareholders, whether individuals or corporations, are taxed on dividends at the relevant rate but there is no national insurance to pay as this is unearned income. Dividends are not classed as a business expense as they are paid out of the businesses profits which are left over AFTER corporation tax has been paid.
In our role as Accountants we can help you to decide the best trading structure for your financial needs, and also your commercial needs because there’s more to running a business than just tax. If a limited company is the best way for you to go then we can help optimise your personal income by extracting profits in a way which reflects the different roles that you hold within your company.