If you’re working as a self employed dentist, you may be aware that you can set up your own limited company – but why would you want to, and how could it help save you money?
You can read our article here which compares self-employment to having a limited company.
Here, we show 2 examples based on the tax rates of 2020/21 of how much tax you could save. Example 1 is the minimum you could save, while Example 2 shows how you can organise your tax affairs to significantly increase the tax saving.
Example 1: Single director/shareholder, takes all cash from the company for personal use
Deirdre has £100,000 income before expenses and is considering whether to be self employed or use a limited company.
As you can see below, having a limited company would save her over £1,000 once the additional accountancy costs are taken into account. She could also save another £500 – £1,000 in tax by using tax free benefits only available to companies.
Deirdre has taken all the profits from the company as salary and dividends. If she has children, she won’t be able to keep any Child Benefit because once personal income goes over £60,000, you are not entitled to any Child Benefit payments.
| Company | Self-employed | |
| Turnover | £100,000 | £100,000 |
| Salary for Deirdre | £8,500 | |
| Other expenses | £9,000 | £8,000 |
| Profit | £82,500 | £92,000 |
| Taxes | ||
| Corporation tax on company profit | £15,675 | |
| Deirdre’s tax | £10,893 | £24,220 |
| Deirdre’s national insurance | £4,640 | |
| Additional accountancy costs | £1,000 | |
| Total | £27,568 | £28,860 |
Example 2: Include a spouse as a director/shareholder and reduce the amount of dividends taken
As in the previous example, Deirdre has £100,000 income before expenses. She has a spouse who will also be a director of the company if she decides on this option. Her spouse earns £35,000 per year.
As you can see below, having a limited company could save her nearly £10,000 in tax. Deirdre has only taken £50,000 for herself and £10,500 for her spouse from her company in salary and dividends so that neither she nor her spouse pays higher rates of tax. Personal income over £50,000 would be taxed at a higher rate, and would also mean she would start to lose Child Benefit if she was claiming it.
This means that at the end of the year, after paying expenses and taking salaries and dividends, there is still £17,000 in the company’s bank account that she hasn’t withdrawn for personal use. There are a number of options for this cash – leave in the company as savings, make payments to a personal pension, make an investment, etc
| Company | Self-employed | |
| Turnover | £100,000 | £100,000 |
| Salaries for Deirdre and spouse | £21,000 | |
| Other expenses | £9,000 | £8,000 |
| Profit | £70,000 | £92,000 |
| Taxes | ||
| Corporation tax on company profit | £13,300 | |
| Deirdre’s tax | £2,663 | £24,1000 |
| Deirdre’s national insurance | £445 | £4,634 |
| Spouse’s tax | £1,700 | |
| Additional accountancy costs | £1,000 | |
| Total | £19,108 | £28,734 |
Additionally, if Deirdre claims Child Benefit, she will also receive £1,095 for her first child and £725 for each additional child. This is because once your personal income goes over £60,000, you are not entitled to any Child Benefit payments.
