Tom runs a consultancy with 250,000 pounds of turnover and 60,000 pounds of costs. As a sole trader, the tax and National Insurance on that profit came to roughly 57,632 pounds.
Through a limited company the picture changed. He took a director salary of 12,570 pounds, employed one person on 30,000 pounds, and drew 40,000 pounds of dividends. Corporation tax on 147,430 pounds of taxable profit came to 35,318.95 pounds after marginal relief. Dividend tax added 4,031.25 pounds. Employer National Insurance of 4,885.50 pounds was fully covered by the Employment Allowance, and the employee PAYE came to 4,880 pounds.
Total tax on the company route was about 39,350 pounds, roughly 18,281 pounds less than trading in his own name, because profit left inside the company is taxed once at the company rate rather than at his personal marginal rate.
The trade offs were real. He now files a company tax return, annual accounts, a confirmation statement, payroll returns and quarterly VAT of 38,000 pounds for the period. Money inside the company is not his personal money until it is paid out properly.
He set aside the VAT the day each invoice was paid, kept the payroll on a schedule, and diarised every filing date. The saving is only a saving if the penalties never arrive.
The lesson: the wrapper you trade through changes the bill more than almost any single deduction.