There has been a steady growth in the number of self employed businesses, contractors and freelance consultants in the UK over recent years. This follows an influx of skilled professionals and wealthy businessmen from overseas to London which is seen as a “safe haven” in Europe.
Self employed individuals can set up their business using the three principal methods in the UK – as a Sole Trader, Partnership or Limited Company. All three methods have their own distinct advantages and disadvantages and depend to an extent to the circumstances of the individual.
However, the most popular method is the Limited Company set up which is the most tax effective method for individuals earning more than £100,000. This is due predominantly to the advantages of taking income through dividend distributions. Basic rate taxpayers do not pay any tax on their dividend incomes and higher rate taxpayers pay an effective 25% marginal rate of tax which is significantly lower than the 40% higher rate tax on earnings. Individuals who earn over £150,000 and fall into the top rate income tax band will be subject to an effective rate of tax on dividend income of 36.1% which is significantly lower than the 50% imposed on sole traders and partnerships. Tax planning is crucial to high earners who could make significant savings if they are advised accordingly.
At Belsize Accountancy we provide commercial and tax advice to minimise your marginal rate of tax and structure your financial affairs effectively. For more information please contact us on 0207 043 0052 or send us an email to tax@belsizeacountancy.co.uk.