Historically, dividends paid by a service company have been seen as advantageous because there are no National Insurance Contributions (NICs) payable on a dividend.
Following the Autumn Statement is it still beneficial for a one man band to work through a personal service company. The answer is – maybe, but there is now very little tax saving to be had, if any, from working through a company.
If you need to withdraw all of the profits from your company to live, then you will, one way of another, suffer much about the same tax and NI as if you were self-employed or on PAYE.
However service companies are likely to remain popular for some time yet. Their main advantages are:
- Profits not required to cover living costs can be retained in a company and possibly extracted on retirement at a tax rate of 10% through liquidation.
- Sometimes, contractors reduce the profits in their company by expenses which would not reduce taxable employment income.
- Service companies can sometimes be used to split income so it is taxed between a couple. If that means individual income can be kept below £50,000, child benefit might not be lost.
The increased tax rates on dividends and increased rates of corporation tax reduce the attractiveness of personal service companies. Then you have IR35 and all the administrative burdens of operating a company.
However, there are times when a personal service company is the most effective vehicle so given the other advantages outlined above, we will be seeing personal service companies for some time yet.