Growing a side business whilst employed - tax advice needed!

[GLM1984]

Hi all,

I am really struggling to get some clarification on this and was hoping some of you can help. So basically, I am a full time employee on a decent wage (80k-90k pa depending on commission).

For the past three years I have also had a side business which is writing music remotely from home. I have only done small numbers, as this is more of a passion that I have started to get paid for. Last year I made almost 10k and am hoping to double/triple that this year.

As I do the side business as a sole trader, I am paying 40% tax on anything I make as it gets added onto my day job earnings (from a tax code point of view). As I am only making small numbers this hits hard and I have been advised to turn this into a limited company instead, to pay less tax.

Here's where I am struggling...if I change the business to a limited company I will then only pay 20% corporation tax on profits. But, then I will still have to declare any dividends I take over 2k on my self assessment, so I will be paying 32.5% I believe (as it will again go on top of my regular job earnings).

So really, I would be paying 52.5% tax overall instead of 40% as a sole trader?

If that is the case the only benefit to going limited I can see is that if I do not take any money our I can leave it in the account and let it grow for a few years whilst only paying 20% instead of 40%? Also the small perk of taking 2k dividend tax free a year (and also the same for my wife as a shareholder).

Can anyone advise if I am missing anything here and if others have been in this situation? It seems hard to find information about this but I am sure there are lots of people starting side businesses on top of a regular wage.

Thank you in advance and look forward to any help!

 

[WaveJumper]

Welcome the the UKBF there are plenty of accountants on here who I am sure will be along today with a view on this, hopefully pointing you in the right direction. One thought from me well two actually first are you making sure you are claiming all relevant expenses for your side hustle and 2 sitting down and having a face to face conversation with a local accountant would be my recommendation could save you thousands in the long run.

 

[GLM1984]

Thanks for the reply!

Yes I do put expenses through and I've had a meeting with an accountant. He kind of pointed me towards going limited but didn't really give me any great insights to be honest.

 

[Scalloway]

You will also pay Class 4 NI on your self employed profits. No NI on company profit or dividends

Self-employed National Insurance rates

National Insurance contributions if you're self-employed - rates and exceptions.

www.gov.uk

 

[Rawlinson Pryde]

You have your Ltd Co % route wrong as you are taxing your gross (£10k) twice

If you make a £10k profit and suffer CT at 19% = £8,100 net and then pay it all out as dividends — £2k = £0 tax and £6,100 @ 32.5% = £1,982.50 of tax

Total Tax = CT £1,900 + £1,982.50 = £3,882.50 tax = 38.825%

You may have a £100k Personal Allowance issue

Also ignored Health And Social Care Levy 1.25% extra from 6 April 2022

 

[Rawlinson Pryde]

Thought I would add if you received a salary (must be careful with how much) from your company you may be able to save a little more tax.

£10k less salary of £7,530 = profit of £2,470 with CT 19% £470 approx = £2,000 net and dividend paid resulting in 0 tax.

Salary £7,530 taxed at 40% = £3,012 + £470 of CT = £3,482 = effective tax rate of 34.82%.

Also the wife was ignored in both of these calculations. There may be better ways to do things.

 

[Ozzy]

@Rawlinson Pryde has given the calculations above which is great, and I'd agree with their general view that based on you existing salary keeping the funds within a Limited company makes sense. Especially if you don't really need the money on a regular basis, it remains within the company separate from you. Then draw dividends as and when needed, and as RP says consider your spouse if applicable.

 

[STDFR33]

Whilst there may be tax to be saved by operating through a limited company, but you company accounts are much more complicated than completing your self-assessment. You'll more than likely need the services of an accountant, so you should factor that cost in to any 'savings'.

 

[GLM1984]

Many thanks for the replies everyone. It's certainly not as much of a 'no-brainer' to simply go limited as I was led to believe so glad I asked!

As you say there is extra work involved and also accountancy fees to consider.

Thanks again for the input.