Savings to be made through incorporation
Self-employed individuals (other than actors) may save tax and national insurance by forming a limited company and transferring their business to that company. The potential savings are principally from:
- Allowing you to stop paying national insurance.
- Giving the opportunity for income to be split with a spouse or civil partner.
Actors who are self-employed but on Equity contracts have national insurance deducted from their pay. If an actor's pay goes to their company, the company then has to pay both employee’s and employer’s national insurance contributions.
Income splitting
If your spouse or civil partner has little or no taxable earnings then you should be able to gain the maximum advantage of splitting income to spread your tax liability. However, if you pay tax at 40% or 50% and your spouse or civil partner is a basic rate tax payer there can still be a substantial tax saving.
Extra savings
Those who earn royalties from their work e.g. writers, choreographers, designers etc can gain an advantage by selling the rights to their work to the company. The sale is then subject to capital gains tax which is lower than income tax.
Running a company
When running a company, there must be a company bank account and the maximum money that can be taken out of the company is the income, less expenses and tax, i.e. the company should always maintain a tax reserve.
Contracts for income and expenditure have to be in the company’s name and VAT registrations can be transferred from individuals to companies.
The company should pay a small salary under a PAYE scheme to maintain an entitlement to basic state benefits.
Should you consider incorporation?
If you are a basic rate taxpayer and are not able to split your income with a spouse or civil partner then it is unlikely to be worthwhile forming a company. However, if you are regularly paying higher rate tax and you are able to split your income with a spouse or civil partner then you should consider incorporation.
Contact us
Maclntyre Hudson can evaluate your circumstances, advise whether incorporation is beneficial and deal with every aspect of forming a company. For further information, please contact a member of our media & entertainment team or email your enquiry to us.
