Tax provisions for a limited company

BV writes: I have just started to work as a part-time computer consultant. To be accepted for jobs through agencies, I was told to form a limited company, which I have done. My question concerns the most tax-efficient method of paying myself. I have read that I can either pay myself as an employee or the company can pay a dividend. I also have another job where I am taxed under PAYE. This income covers my personal allowances and means that I pay a basic level of National Insurance contributions. Second, on average what percentage of the incoming money should I set aside to cover company taxes?

Answer

As an owner manager of your limited company at the moment you have the choice of how to extract the surplus funds from your company. The most tax-efficient of the two alternatives is for your company to pay you dividends. This avoids employers´ and employees´ National Insurance contributions. These dividends can be paid as many times as you wish throughout the year but are best taken quarterly to keep the paperwork manageable. But there is one big disadvantage of taking all your earnings from your company by way of dividend. That is that dividends do not count as relevant earnings for pension payments and therefore, depending on the level of your other earnings, you may need to consider taking some salary from the company if you need to increase the level of your relevant earnings. Taking your earnings from the company by way of dividend means that the profits of the company are maximised and corporation tax will be due on these larger profits. If you were to set aside 20% of the income that you receive from your clients then this should cover any resultant tax liability on the net profits of the company after deducting any relevant costs. If you were to become a higher-rate taxpayer as a result of the dividends received you might wish to consider retaining a greater percentage of the company´s income within the company in order to defer any higher-rate charge.