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Tony Tax
Tony Tax, Tax Consultant
Category: UK Tax
Satisfied Customers: 15899
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Hi. Can you tell me this? I have two strands of income.

Resolved Question:

Can you tell me this? I have two strands of income. One has to be as a sole practitioner for professional reasons. The other I can protect by setting up a limited company.

I know that I would not pay VAT on the limited company income and only pay corporation tax.

My question though is this. If I did set up a limited company, pay corporation tax and draw dividends from the company into my personal account would I also have to pay personal tax? If so, whats the point?

Submitted: 3 years ago.
Category: UK Tax
Expert:  Tony Tax replied 3 years ago.


A company pays corporation tax at 20% on profits up to £300,000. As a director/shareholder, you can take money out in three ways, through salary, through dividend or repayment of money you may have loaned the company personally.

If you take salary, it will be subject to PAYE income tax and employee and employer national insurance contributions depending on the level of the salary. The company can claim the salary costs as expense in its accounts so it will save 20% in corporation tax.

If you take dividends as a shareholder these are treated as basic rate tax paid and you will only have further tax to pay personally if your total income for the tax year concerned is more than £41,450. Take a look here for information on tax and dividends. In theory, you could take dividends up to £37,305 (grosses up to £41,450) and pay no personal tax so long as you had no other income in the same tax year and your company had undistributed profit of that amount or more. Since a dividend is simply a distribution of profit by the company to its shareholders, it does not reduce the company's profit for corporation tax purpose as salary does.

There is no tax to pay on the repayment of monies loaned to the company by the director/shareholder unless interest is charged.

Many one or two man companies pay a combination of low salaries to keep the tax and nic charges down and dividend. The higher the profit, the more tax efficient it becomes for higher rate taxpayers. In addition, dividends can be taken as and when needed provided there is profit available so as a director/shareholder you can manipulate when you take income to improve tax efficiency.


Try putting some profit figures into the comparison calculator here to see the difference in tax and nic liabilities on different types of income.

I hope this helps but let me know if you have nay further questions.

Customer: replied 3 years ago.

Thanks but I do have another income. It isn't very high but its increasing.

What impact would that have?
Expert:  Tony Tax replied 3 years ago.
If your total income from all sources exceeds £41,450 in the current tax year, you will pay higher rate tax on the excess. Whether that is at 40% on salary from your company or 32.5% (less the 10% tax credit) on dividends depends on how you draw income from your company, salary or dividends or both. You can choose to keep your drawings from the company at a level that keeps you within the 20% tax band of course, taking account of your other income. That is the flexibility of running a business through a company.
Customer: replied 3 years ago.
That is brilliant.

So its only on the excess? Have you been paid for this? I keep pressing accept and nothing is happening.
Expert:  Tony Tax replied 3 years ago.
That's correct.

If you had a total income from all sources of £35,000 say including £20,000 in dividends, you would pay no tax on the dividends. Of course, you would pay corporation tax at 20% on your company profits. Dividends are not liable to NIC and there is where the saving is mainly.

Try clicking on a smiley face, OR or better.
Tony Tax and other UK Tax Specialists are ready to help you
Customer: replied 3 years ago.

I don't get smiley faces. I get an accept button.
Expert:  Tony Tax replied 3 years ago.
OK, you have accepted now. Thanks.

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