There are no tax savings available by otherwise self employed persons trading through a company.

A basic rate taxpayer pays 10.75% tax on dividends exceeding the £500 dividend tax free allowance within the basic rate band of £37700.

Companies pay 19% corporation tax on annual profits at or below £50000.  

Employee's NIC at 8% commences on an annual salary above £12570.

Employer's NIC at 15% commences on an annual salary above £5000 for a director of a company and who is the only employee.

Example 1                                                                           

A self employed person with annual profits of £25000 would pay 20% basic rate income tax on profits above their £12570 personal allowance and 6% class 4 NIC on profits above £12570 - resulting in £3231.80 income tax and NIC [26%(£25000 - £12570)].  

An otherwise identical person as director and shareholder of a company taking the maximum annual salary not subject to employee's NIC of £12570 would pay £1135.50 employer's NIC [15%(£12570 - £5000)], £2145.86 corporation tax [19%(£25000 - £12570 - £1136)] and £929.66 income tax on dividends [10.75%(£25000 - £1136 NIC - £12570 salary - £2146 corporation tax - £500 dividend tax free allowance)]. 

In this example, trading through a company as its director and shareholder leads to an overall cost of £979.22. 

Example 2 

Alternatively, should an otherwise identical self employed person trade through a company as its shareholder and employee but not its director, employer's NIC is not relevant as the first £10500 employer's NIC is exempt from payment because of the annual £10500 statutory 'employment allowance' available to companies where the director is not the sole employee.  

Therefore, an otherwise identical person as shareholder and employee of a company but not its director taking the maximum annual salary not subject to income tax of £12570 would pay £2361.70 corporation tax [19%(£25000 - £12570)] and £1028.56 income tax on dividends [10.75%(£25000 - £12570 salary - £2362 corporation tax - £500 dividend tax free allowance)].

In this example, trading through a company as its shareholder and employee but not its director leads to an overall cost of £158.46 .

The difference of £820.76 between £158.46 and £979.22 from example 1 arises from, first, a £215.84 increase in corporation tax at a rate of 19% upon the elimination of £1136 employer’s NIC. Second, the £1135.50 saving in employer’s NIC. Third, the £215.84 increase in corporation tax and the £1135.50 saving in employer’s NIC result in an increase in dividends of £919.66 and which is taxable at 10.75% - resulting in £98.90 income tax. Combining all the foregoing 3 elements, £1135.50 - £215.84 - £98.90, results in the difference of £820.76.  

Example 3

Further and alternatively, an otherwise identical self employed person trades through a company as its shareholder and employee but not its director where the director is also a shareholder.  Assuming the director has otherwise used their £12570 tax free personal allowance but none of their £500 tax free dividend allowance, £500 tax free dividends may be paid to the director.  Such a re-allocation of dividends would lead to a saving of £53.75 (10.75% x  £500) compared to example 2.

Therefore, in this example, trading through a company as its shareholder and employee but not its director where the director is also a shareholder leads to a reduced overall cost of £104.71.