09 Nov Freelancers: should you become a limited company?
At first glance, many freelancers might see becoming a limited company as overkill. A load of paperwork and extra stress, and for what? We often see limited companies as something for people with offices and employees, but for the right freelancer, the switch could save you a lot of money every year.
To start with, it is true that the amount of paperwork you’ll need to deal with will increase. That means more complications and time-consuming activity. But with the money you can save becoming a limited company, you could afford an accountant and still make a significant amount of extra cash after that cost.
So how does it work?
Well, it all comes down to how you pay yourself and the taxes you have to pay. As a regular freelancer, you complete your self-assessment every year, send it off, and pay the taxes that you owe. The process is simple, even if the self-assessment can be a bit of a chore. But with a limited company, you can do things a bit differently.
With this option, you’re an employee of the company you create. Through that company, you then pay yourself the minimum wage and nothing more. Straight away this means you’re massively cutting down on the amount of income tax you’re paying. So far so good, but how do you get the rest of cash you’ve earned over the year?
What you do is pay yourself in dividends instead. This means you’ll get taxed at a lower rate. As it stands, the first £5,000 isn’t taxed, while the lower rate starts at just 7.5%, compared to the 20% lower rate income tax. You can see quite quickly how this can be a huge money saver.
This won’t work for everyone, particularly those earning on the lower side of things. For example, if you’re not making much more than minimum wage as it is, it won’t be worth considering. But if you’re making healthy money, it’s something worth looking into. If you can save enough, you’ll even be able to get the benefit of having an accountant sort everything out for you.
Imagine it. No self-assessment and more money than usual. You can’t really say better than that. At SQK Accountancy, we can help you out with further advice on starting your own limited company, so simply give us a call today.