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I am a UK resident, IT freelancer with a UK limited company working with a US client. I am wondering if it makes more sense to switch to an Estonian company. Having read the following article I am still not clear.

In the UK, if my company earns in revenue say £ 4000, I will pay 20 % corporation tax leaving me with £ 3200. I then pay out a salary of 3200 to myself and pay UK income tax on that which leaves around 2560 actual cash. (Assuming I get 20% personal income tax in the UK but not sure.)

With an Estonian company, no corporation tax is paid but 20% tax is paid on distribution of profits. If the revenue is £ 4000, when I pay my salary does that count as distribution of profits? Or will I receive the full £ 4000 and then pay UK personal income tax?

david_adler
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2 Answers2

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OK, it's a bit of a minefield but here goes!

  1. You only pay corporation tax in the UK on any profit made, so your "salary" would not be classed as part of the profit, so in the example you give you would only pay corporation tax on £4k less your "salary" ie £3,200 so profit on the £800 remaining gross profit.

  2. You don't say if your figures are monthly, annual etc, but you only pay income tax if you earn over £11.5k in any given tax year, the rates increase as your income does, check here: https://www.gov.uk/income-tax-rates

You may have a different tax code, you would need to check that with HMRC but the link gives the "default" position which is correct for most people.

  1. When you refer to "disctribution of profits" I think you mean "dividends" - in the UK if you pay yourself a dividend the tax rate is lower, see here:

https://www.itcontracting.com/limited-company-dividends/

If the figures you give are monthly then I would consult an accountant as they are likely to save you more than they will charge for their services.

You will probably find it is most tax efficient to pay yourself a dividend from the company's profits but check with an accountant.

More info:

https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company

davidjwest
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In principle, when you are the sole owner of a limited company, and also the sole employee, then it is much easier to assume that someone else is the employee. Let's say your twin brother John Adler.

John Adler receives a salary from David Adler's company. Of course John has to pay income tax on his salary. Absolutely in the UK, and in Estonia as well if they have any sensible tax laws at all (which I assume but don't know for sure).

Then there is the company. It's profit equals revenue, minus cost. You said £4000 revenue, and John Adler's salary, plus anything the company has to pay on top of the salary, is cost, which is subtracted from the revenue to calculate profit. In the UK, the company pays 20% corporation tax on those profits, and the rest stays in its bank account (or may be in goods that the company purchased).

Where does David Adler come in? He owns the company, but doesn't work for it and gets no salary. He owns the company, but he does not own the company's money. He can't just help himself to the money. He can get a loan from the company, and is personally responsible for repaying that loan. If it's not repaid, HMRC will be very angry which will hurt. Or he can pay himself a dividend, and pays dividend tax on it. Or of course he can leave the money in the company.

That's exactly how it works in the UK, and I would assume Estonia to be similar. And of course if it's not the twin brother who is the employee, but the OP himself, then the situation is exactly the same.

gnasher729
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