Company profits or self-employed income?
Higher corporation tax rates from 2023 will increase the tax cost on company profits before and after they are extracted from your business. Might working freelance be more tax and NI efficient?
Dividend tax v salaries
We recently looked at the how the higher corporation tax (CT) rates from April 2023 will erode the comparative tax efficiency of dividends over salaries. The higher CT rates might mean the time is right to consider if it’s still advantageous for tax purposes to run your business through a company. Many tax experts are already predicting an exodus from small owner-managed companies to self-employed (freelance traders and partnerships).
Will all companies be tax inefficient?
There are many factors which can swing the position one way or the other. For example, how much profit/income you intend to take from your company and what other taxable income or outgoings you have.
Tip. One way to maximise tax efficiency is to split your business income between your company and freelance work so you can get the best of both worlds.
The table looks at the comparative tax and NI liabilities for dividend income and freelance profits. For this we’ve worked out the net income a company owner would get from a £10,000 dividend and what they would end up with from the same amount of profit from self- employment. We compare the position at current tax and NI rates with that from April 2023 when higher rates apply.
What the figures do and don’t show
The table shows that under the current rules a freelancer with profits up to the higher rate band will be better off by £300 for each £10,000 on which they pay tax compared with company profit taken as dividends. They are worse off by £400 per £10,000 for profits above this. From April 2023 they are worse off whether they are a higher or basic rate taxpayer by £706 and £131 per £10,000 respectively. As we’ve already mentioned, there are other factors involved when comparing tax and NI liabilities on dividends to profits from self-employment which can improve the net take from dividends. However, the trend shown by the table above holds true.
Tip. The ideal position is to keep company profits you intend to draw as dividends at a level close to the basic rate band limit and generate further income as self-employed. This could be done by:
operating as a freelancer independently from your company
working as a freelance contractor for your company.
Always discuss any plans you have to change your business structure with an accountant or tax advisor before going ahead.
For many business owners the most tax and NI-efficient way to generate profits from April 2023 will be, where feasible, to split their business between company and freelance work. There are many factors that need to be considered when making a change to your business structure so discuss these with your accountant beforehand.