Set up a Limited Company – New Bugdet 2011

Small companies with profits of £300,000 or less a year will pay 20% tax from April 11, down from 21% at present. Employees and the self-employed pay up to 50% if they earn more than £150,000. With National Insurance contributions ( NIC ) the rate rises to 52%.

Take someone who is self-employed and earns £200,000 a year. They would pay tax and NIC of £84,344 from April, leaving take-home pay of £115,656

However, suppose you set yourself up as a company. First you would pay yourself £7,475 salary, equivalent to the new higher personal allowance. You would then pay corporation tax of 20% on the remaining £192,525 left in the business ( £38,505) – leaving £154,020 to be paid as dividends. You could take for example £100,000 as a dividend to leave some profit that can roll up inside the company.

You have already taken £7,475 as tax-free salary, which gives a NIC bill of £55. The remaining £92,525 is a dividend wich is deemed to be taxed at 10%, giving a real dividend of £83,272. The first £31,410 ( 90% of the £34,900 basic rate tax band ) of this is tax-free, because corporation tax has already been paid. The reminder is taxed at 25%, giving a total bill of £12,966. Added to the corporation tax and NIC bills, this comes to £51,526

You are £32,818 better off than if you received a salary of £200,000, but you have left £54,020 profits inside the company, which you take out when the company is sold, minus 10%. This is the lower capital gains tax ( CGT) rate payable by enterpreneurs on the first £5m of lifetime gains. Therefore, the total saving of £27,416. The saving increases if you set up a company with your spouse and use this to divide income between a husband and wife who both own shares in the firm – known as income splitting.