FINANCIAL SURGERY
Self-employed or limited company?
Two of the questions I am frequently asked are: a) I am self-employed (S-E), should I become a limited company (LC)? or, b) I am a LC, | should I revert to S-E?, says LiveWire Company Secretary, Roy Phillips.

Each individual situation is different. By way of illustration, here are two examples based on a profit of £40,000 showing what the tax and National Insurance Contribution (NIC) would be in each circumstance.

SELF-EMPLOYED
Profit	(a)	£40,000
Personal allowance		£6,975
		£33,695
Tax @ 20%		£6,793
Class 2 NIC		£120
Class 4 NIC		£2,765
Total liabilities	(b)	£9,678
Net income (a – b)		£30,322

LIMITED COMPANY
Profit		£40,000
Take a salary of		£6,000
This is covered by personal allowance, so there is no tax to pay.		£0
Class 2 NIC		£61
Class 4 NIC		£72
Net salary		£5,939

The company would have to pay corporation tax of 21% on £4,000 - £6,072 = £7,125, leaving the company £26,800 which it could pay out as a dividend.

Net income		£32,739

So as these two examples show, there can be a financial advantage in favour of LC status. One last point though – the LC does have to comply with some regulations, such as an annual return to Companies House and annual accounts having to be prepared in a prescribed format.