Many local electricians like ourselves have often wondered whether to become self-employed in an electrical services company or to registered limited liability companies for the purposes of taxation. The question is very broad in that to start a limited liability company has additional legal measures that you will need to adhere to in order to become a registered company.
But for the purposes of this article, let’s limit ourselves to the taxation rules of a self-employed electrician against those of a limited liability company.
Advantages of self-employment in relation to tax in the UK
Tax money retention
It is important to note that as a self-employed electrician, you will not have your tax deducted as PAYE. This means that you will be able to retain your money for a period of 6 months as tax is payable on 31st July and 31st January. Your cash flow position will improve significantly in the intermittent months.
You can make an expense claim
Like any other business, you will deduct all your business expenses before paying tax. These expenses include cost of goods from sales revenue, capital allowances, and interest on loans.
Government funding
All self-employed electricians in the UK will qualify for the Prince’s Trust if they are aged between 18 and 30 and want to start their own businesses
Regeneration area
If your business is located in any regeneration area in Britain, you qualify for government funding if you want to start a business. So why not take advantage of this?
Child tax credits
Any self-employed business owner in the UK qualifies for the tax credit depending on the number of children under 16 and adults within the family that are working.
Advantages of a limited liability company in relation to tax in the UK
Less Personal Tax
If you are an owner of a limited liability company, you can decide to do away with the salary (which is taxable as PAYE) and get paid with dividends which attract lesser taxation.
Corporation tax set at 20%, set to be lowered to 17%
Companies are taxed what is called corporate tax. In the UK, the company profits are taxed at the rate of 20%. This is set to be lowered to 17% by 2020.
Government funding
Corporations, especially those in charity works attract heavy government funding, mostly at very low interest rates.
Flexibility of salary/dividend tax mix
Limited liability company directors can opt to get small salaries while the remainder of their emoluments is paid as dividends. This will depending on the prevailing taxation regime. If the PAYE is lower than dividends tax, then the director will go with the former. Sometimes they will mx the two.
Allowable expenses and reliefs flexible
In many jurisdictions, United Kingdom included, there is a very flexible schedule of allowable expenses and reliefs. This ideally lowers the amount of tax owed to governments.
Based on the above taxation advantages, it is for the business owner to decide which of the two options – self-employment and LLC – to go with. In the words of experts, they advise that electricians start off as self-employed business owners and then as business grows, they graduate these businesses into limited liability companies. This is not cast in stone though. You can opt for whatever option that best works for you.