It’s a question around limited companies that we get asked all the time.
The short answer is (in the words of Little Britain’s schoolgirl Vicky Pollard), ‘No, but….’.
New business owners often get confused because they hear things like:
“You don’t pay tax in business until you start earning over £12.5k”.
At the time of writing (!) this is true for many self-employed people. This common view comes from the availability of the tax-free personal allowance. This applies to most UK taxpayers. So, as a self-employed owner where their business is their only income, this is broadly true – they will pay no income tax.
Limited companies tax free allowances
Where a limited company in concerned, there is no equivalent. If your limited company business earns even £1 of profit, it will have a tax bill.
That said, in some circumstances it can feel the same as the self-employed situation. It could be possible to pay yourself a salary as the director that wipes out the taxable profit. This would mean that you have no tax bill.
Here’s an example of how that would work:
-
- You had £9,000 profit
and
-
- You paid yourself a salary of £9,000 through a payroll scheme (so ‘officially’ with HMRC)
This means that:
-
- You would have zero profit
and therefore
-
- You would pay zero company (‘Corporation’) tax.
BUT
-
- You would then be taxed on this £9,000 salary as an individual.
This example shows how you can effectively shift the tax bill to you personally, as the owner.
Here’s the smart part. In this example as your business is your only income, you have your UK personal allowance available, which at the time of writing is £12,570 a year. Therefore, you have no tax to pay on this salary as the salary is less than the personal allowance. In this scenario, it effectively could feel like a tax-free threshold.
Earnings and side hustles
Using another example, if you are a business owner earning £25,000 in a regular employed job already, with a £9,000 profit in your side hustle limited company, it doesn’t work out like this.
As you are using your tax-free personal allowance against your £25,000 employed (‘PAYE’) income, it’s not available to use elsewhere.
What this means is if we did the same thing again, and declared the £9,000 salary, what would happen is:
- The company would pay no tax as it is still at zero profit.
But
- The owner would stack this £9,000 salary on top of their employment income.
- As there is no tax-free allowance ‘left over’ to use, they would pay 20% income tax on this.
No tax-free allowance for a limited company
So, in summary, there is no tax-free allowance for a limited company. You should consider if you have a personal allowance free to use, to make sure you aren’t paying tax where you don’t need to.
To see the ways to pay yourself as a limited company explained in a little more detail, see our blog on the subject.
I’m still confused about how to declare my various earnings
Ask your accountant or book a consultation with us to help you make the most of your personal tax-free allowances, side hustle income, etc.
Book a pre-paid 1 hour, 1-2-1 consultation so you can ask simple questions of an accountant here at Heelan Associates. You don’t have to be a client, so it’s a great way for you to get the help, when you need it.