Could you save money if your creative business became a company? If you’re working freelance, it’s useful to know the benefits of registering as a limited company.
Joshua Danton Boyd, of accounting firm Crunch, outlined the differences it can make.
You may be doing very well for yourself as a freelancer. You’ve built up your reputation over the years, and now you have a steady stream of business coming in. The days of trawling the world looking for scraps of work are long gone.
Some people are perfectly content to carry on like this. But with some extra work, you could end up saving yourself a fair bit of money on your tax, car and home. One way to do this is to form your own limited company.
People often balk at this and assume it can be very complicated, but it doesn't have to be. Forming a limited company is a cheap and simple procedure. The main thing you need to be is organised.
Making savings on your tax as a limited company
The tax you pay as a freelancer is very different to the tax you pay for a limited company.
You can take advantage of the £8,105 personal allowance offered by the Government.
For a start, the company’s profits are taxed between 10 per cent and 30 per cent (the 'small companies' rate is 20 per cent).
This is in comparison to, depending on your earnings, 40 per cent for a usual wage.
That’s a great start already, but there's a further change you can make to be even better off.
Paying yourself a company wage
While working for your company you should pay yourself the minimum wage. This means you can take full advantage of the £8,105 personal allowance offered by the Government. This means that a very small amount of tax is being paid.
Of course, you don’t want to just earn minimum wage at your company, so you have the option to pay yourself in dividends instead.
Dividends come directly from your company’s profits, but they are only taxed at 10 per cent and carry no National Insurance charge. On top of that, you can pay them whenever you like and for however much. This can give you better flexibility and control, as well as saving you cash.
Saving money on your car
You might think that now you have a company, getting a company car would be a good idea.
If you’re worried about it being complicated, an accountant can help you avoid drowning in tax forms.
As a status symbol it might sound good, but financially speaking, it isn’t a great idea. Keeping your own car, even if it's a rusty piece of work, may well leave you much better off.
You can claim back the mileage used for business trips with your personal car, which means tax-free fuel and a tax deduction for the company itself.
Registering your home as your business address
Your limited company also needs a registered address. If you work from home, making your house your business address might be your best bet.
Apart from general convenience, you can claim back the costs of your office. All you need to do is work out your living costs (this includes your rent or mortgage, and all the usual bills) and divide it by the number of rooms in your house. That final number is then free for you to claim back.
Registering as a limited company could mean you make some significant savings. If you’re worried about it being complicated, there are plenty of cost-effective online accountancy firms who can help you stay on track and avoid drowning in tax forms.