A Limited Company in the UK is a great solution for digital nomads looking to establish and run a business. Are you wondering what the taxation of your income will look like if you decide to open a limited company in the UK?
In this article, we present and explain the different taxation brackets as well as provide examples for how different amounts of income paid out of the company might be taxed depending on a couple of factors.
What do the different taxation brackets mean for digital nomads?
0% – income paid out as director’s fees, with the total yearly amount not exceeding the Secondary Threshold. No National Insurance Contributions or Personal Income Tax are paid in this case.
For more information about National Insurance Contributions and the explanations of Primary Threshold (PT) and Secondary Threshold (ST), visit our article: National Insurance for Digital Nomads in the UK
12% – Employee National Insurance Contributions (Employee NICs) with Employment Allowance. Employment Allowance makes it possible for companies with more than one employee, not to pay the initial 4 000 GBP of calculated Employer NICs. The purpose for this allowance is to incentivise sole company directors to hire additional employees (and this includes additional directors)
13,8% – Employer National Insurance Contributions (Employer NICs). This NIC rate applies only to sole company directors before the amount of their income reaches the Primary Threshold.
25,8% – Employee NICs (12%) + Employer NICs (13,8%) applicable to incomes not yet exceeding the Personal Allowance. Personal Allowance is a threshold below which individual employees (and this includes LTD company directors) are not liable to pay personal Income Tax in the UK, it is currently set at 12 500 GBP per year.
32% – Employee NICs (12%) + Personal Income Tax (20%) with the Employment Allowance still applicable.
34,4% – Corporation Tax in the UK (19%) + Capital Gains Tax (19% – we used this as an example, as this is a common rate for capital gains taxes). This is an example of how a dividend paid out to the shareholders (owners) of a UK LTD company might be taxed. Please check what is the current capital gains tax (or dividend tax) rate in your country of tax residence and calculate the applicable rate, using our example below.
How is the 34,4% rate calculated?
First, the company will pay Corporation Tax (19%) in the UK on the income it wants to pay out as dividend to its shareholders. Then, after the income being paid out is reduced by 19%, the shareholder will have to pay the foreign capital gains tax or dividend tax in their current country of tax residence. Of course, some countries do not subject dividend income from foreign companies to a dividend or capital gains tax.
Let’s assume you would like to pay out 100 GBP as a dividend.
Corporation Tax in the UK – 19%:
100 * (1 – 19% ) = 81 GBP
Capital Gains Tax in your country of tax residence, we assume it has a rate of 19%:
81 * (1 – 19%) = 65,61 GBP
therefore:
(100-65,61)/100 = 34,39% = ~ 34,4 % taxation.
A dividend, despite its double taxation is a reasonable method for paying out income from the company when you would like to take out a larger amount and the Employment Allowance is no longer applicable. The alternative would be to pay out a director’s fee taxed at 45,8% (Personal Income Tax + Employee NICs + Employer NICs).
How much tax will you and your limited company have to pay depending on the amount of directors it employs?
Let’s assume you would like to pay out a certain amount from your company. How will it be taxed depending on the number of directors your company employs? Let’s look at sample cases.
First case: 30 409 GBP per year
With one director:
For an income between 0 – 8 788 GBP: 0%
For an income between 8 788 – 9 500 GBP:
13,8% * 712 = 98,26 GBP
For an income between 9 500 – 12 500 GBP:
25,8% * 3 000 = 774 GBP
For an income between 12 500 – 30 409 GBP:
34,4% * 17 909 = 6 160,70 GBP
Total: 7 032,96 GBP
With two directors:
For an income between 0 – 19 000 GBP: 0%
For an income between 19 000 – 25 000 GBP:
12% * 6 000 = 720 GBP
For an income between 25 000 – 30 409 GBP
32% * 5 409 = 1 730,88 GBP
Total: 2 450,88 GBP
With three directors:
For an income between 0 – 28 500 GBP: 0%
For an income between 28 500 – 30 409 GBP:
12% * 1 909 = 229,09 GBP
Total: 229,08 GBP
Second case: 46 784 GBP per year
With one director:
For an income between 0 – 8 788 GBP: 0%
For an income between 8 788 – 9 500 GBP:
13,8% * 712 = 98,26 GBP
For an income between 9 500 – 12 500 GBP:
25,8% * 3 000 = 774 GBP
For an income between 12 500 – 46 784 GBP:
34,4% * 34 284 = 11 793,70 GBP
Total: 12 665,96 GBP
With two directors:
For an income between 0 – 19 000 GBP: 0%
For an income between 19 000 – 25 000 GBP:
12% * 6 000 = 720 GBP
For an income between 25 000 – 46 562 GBP:
32% * 21 562 = 6 899,84 GBP
For an income between 46 562 – 46 784 GBP:
34,4% * 222 = 76,37 GBP
Total: 7 696,21 GBP
With three directors:
For an income between 0 – 28 500 GBP: 0%
For an income between 28 500 – 37 500 GBP:
12% * 9 000 = 1 080 GBP
For an income between 37 500 – 46 784 GBP:
32% * 9 284 = 2 970,88 GBP
Total: 4 050,88 GBP
Would you like to open a limited company in the UK in order to run your business as a digital nomad? Are you wondering what might your tax obligations look like once your company is up and running? With these and any other questions, contact our qualified advisors – we’d love to help!
info@owlaccounts.com