Quote: Derwent "The £35k figure is important because that is the threshold for the basic rate of tax at 20%. Anything you earn over £35k will be taxed at 40%.
So, if you earn £50k then on PAYE you'd pay 20% tax on the first £35k and 40% tax on the other £15k.
In a limited company you would pay yourself a salary of say £34,999 to make sure you are a basic rate tax payer. Then, assuming no other costs, your company would have a pre-tax profit of £15,001 (i.e. £50,000 minus £34,999). The company would pay 20% corporation tax at that level of profit. So the £15k profit becomes £12k after tax.
Because you are a basic rate taxpayer, you can then pay yourself a shareholder dividend of the £12k completely tax free.
As an example, a person on £50k on PAYE would have net earnings of around £35k after tax and NI. A limited company on £50k would give you net income of around £38.5k.
But as BG says, you must be very wary of the IR35 rules otherwise you could end up with a substantial bill for back tax.'"
If you pay yourself the £12,000 dividend in the same fiscal year as you take the £34,999 then you will NOT remain a basic rate taxpayer. The dividend will create a higher rate personal tax liability of £3,000 payable via your self-assessment Return.