Do employees, self-employed and limited companies pay the same tax and NI?

This week I was asked the above question from someone in my network, that I cover with a lot of people when I first meet with them so I thought it would be useful to share my answer especially as it can help you with tax savings! 🙂

Self-employed and employees pay the same tax. They pay similar NI but it is worked out differently and a limited company pays a different rate of tax and NI and there can be massive tax savings depending on your business.

Employees/ Self-Employed – Tax & National Insurance

Tax is 20% after the basic personal allowance (£10,600 this year) then 40% for both employees and those who are self-employed.

NI is 12% for employees after a similar but reduced personal allowance (currently £8,060) and then drops to 2% when hits £42,380. NI for those who are self-employed is currently £2.80 per week when profit are over £5,965 plus there is a further 9% over £8,060, then this also drops to 2% when it hits £42,380.

Limited Company – Tax & National Insurance

A small limited company currently only pays 20% tax and only has to pay employers NI on wages currently over £8,112 at 13.8%, and additional this year there is also currently a £2,000 allowance. As a shareholder in a limited company you can currently take dividends from profits after tax at no extra tax to you within the basic taxpayer bracket. When your income reaches the higher rate tax bracket then there is small amount of tax to pay on the dividends that go into the higher rate tax bracket.

Summary

It all depends on your profits and other income but it can be worthwhile to be a limited company. There is a little more admin involved and more reports to HMRC each year, and you also have Companies House to report to. It’s much easier though if you have an accountant helping you as opposed to doing your own tax returns, so there is an extra expense there but the tax savings could offset that and obviously the fees are tax deductible. It can be incredibly helpful to have an accountant helping you anyway in your business whether your are self-employed or a limited company.

If you think there may be benefits to you being a limited company it is important that you speak with an accountant or a tax advisor to review all your income together and especially because rates and allowances change every year along with the occasional ‘what is allowed and what isn’t allowed’. Additionally a limited company is classed as a legal entity so its profits are no longer technically all your money like it is when you are self-employed.

If you wish to discuss this further with me contact me and we can schedule in a finance session or please talk to your accountant.

© Helen Monaghan