I am an employee at a company and pay higher rate tax. I have an opportunity to supplement my income with occasional locum work outside the company which may add £8500 to my annual income.
Is there any advantage to setting up a Ltd company for the locum work considering I already use my tax free allowance and would have to pay higher rate dividend tax on all but the first £2000 (from next April)?
As you say the Dividend Allowance, currently at £5,000 reduces to £2,000 from April 2018 although just to note that this has yet to be made official by way of tax law so could be subject to change.
Let’s assume that it does make law and goes ahead.
If you set up a limited company you’d pay corporation tax at 20% on the profit from the business and then you’d take the remainder as dividends paying tax on the dividends.
Assuming profits of £8,500 then the figures would be …..
Corporation Tax £1,700
Leaving £6,800 to take as Dividends
Income tax at 32.5% (higher rate) on Dividends (assuming income isn’t at the additional rate) £2,210
So the amount you would receive after all of the taxes is £4,590
You could register as self employed for your occasional work.
You would need to complete a self employed supplement (SA103) on your self assessment tax return for this income.
You would pay Income Tax and National Insurance on this income.
Again, let’s assume that you are not an additional rate tax payer; so the rate of income tax on this income would be 40%.
Rates of National Insurance 2017 / 2018
The rates of national insurance are:
- Class 2 if your profits are £6,025 or more a year you pay £2.85 / week
- Class 4 if your profits are £8,164 or more a year then you’ll pay 9% on income from £8,164 to £45,000 and 2% on profits over £45,000
So the tax and national insurance would be:
Income Tax at 40% – £3,400
Class 2 NI £148.20
Class 4 NI £30.24
That would leave an income if £4,921.56 after tax.
On this basis you would be better off running your locum work under self assessment.
Make sure that your work is not within IR35 – you can do this by way of a contract review e.g. using this IR35 Contract Review service for just £90 using discount code LHCA17*crf1. Full details at https://www.larsenhowie.co.uk/ir35-contract-review-full
The calculations assume that your income is not subject to the additional rate of tax (over £150,000)
If your income is over £100,000 your annual personal allowance will decrease by £1 for every £2 that your income is above £100,000.
The above does not consider limiting your liability as a limited company. You may want to consider appropriate insurances for your locum work.
Accountancy costs have not been factored into the above calculations.
The above is based on income of £8,500 and does not take into account any allowable costs.
Advice given is for illustration purposes only and should not be relied upon for your tax planning or tax affairs. We recommend that you seek the advice of a suitably qualified accountant before making any tax planning decisions.