The UK Limited Company for digital nomads is something that could come handy in your tax structuring. You will read all the details you need to know in this article.
UK Limited company for digital nomads: the basics
A limited company is a company form in the United Kingdom. This means that the entity and its financials are separated from your private estate. Furthermore, this also limits your personal liability in case anything would go wrong.
UK Limited company: the tax rules
A limited company is, just like any other company, subject to corporate tax on its profits. In order to calculate your profits, you take your revenue and subtract your expenses. These expenses are, for example, the fees you pay your accountant to take care of your bookkeeping and tax return. Yet, what most people forget is that also their salary as a director is a deductible expense. So, if your company has a revenue of €12.000 but you pay out yourself a wage of €1.000 per month, there will be no taxable profit left.
Corporate tax in the UK amounts to 19% if your profit doesn’t exceed £50.000 per year. If your profit does exceed this threshold, your corporate tax amounts to 25%.
After you paid your corporate taxes, you can decide to pay out what is left over as a dividend. Unlike most countries, the UK doesn’t levy any withholding tax on outgoing dividends. You should check taxes in your country of your personal tax residence as they might still tax your dividend.
Furthermore, it is good to know that if your turnover doesn’t exceed £85.000 you don’t need to levy VAT. This is mainly beneficial if you are working with private clients who can’t reclaim the VAT they pay. In this way, you could gain a competitive advantage as you will be 20% – the percentage of VAT normally applicable – cheaper than other providers.
Taxes on your director salary
I already mentioned that your director salary is a tax deductible cost. However, if you take out a salary this is taxed. Nevertheless, in the UK you have a tax free threshold of around £12.000. This basically means you can take out a salary of £1.000 each month without paying income taxes on it.
If you receive a salary, you should not only look at income taxes but also at social contributions. The normal rate of social contributions amounts to 12%. However, just like with income taxes, there is a tax free threshold. If you don’t make more than £750 per month, you don’t need to pay social contributions.
UK Limited company for digital nomads: get your free pension
Now you know the tax consequences of setting up a UK limited for digital nomads. If you don’t pay out yourself a salary of more than £750 per month, you are not liable to income taxes or social contributions in the UK.
What I didn’t tell you is the greatest thing of it all. You will still qualify to receive a UK state pension after you retire! A full state pension currently amounts to almost £ 10.000 per year. Of course, there are some conditions that apply.
First, you need to pay out yourself a minimal wage of £550 per month. So, as long as you stay between £550 and £750, you are fine.
Second, in order to qualify for a UK state pension you should have at least ten qualifying years. This means that you fulfilled the aforementioned condition for at least 10 years. To get a full state pension as aforementioned, you will need 35 year though. If you have an amount of qualifying years between those two numbers, your state pension will be prorated accordingly. Let’s say you have 20 qualifying years, then you will get 20/35th of the full amount or around £5.500 per year.
One important thing to note is that you will need to have or apply for a UK National Insurance Number in order to qualify for this benefit. Depending on your personal situation this might prove to be an additional burden.
Setting up a UK Limited for digital nomads can be an interesting option for you. If you can divert part of your income to the limited and take out a limited salary, you won’t pay any taxes on it. Yet, on the same time, you are still building up a state pension. Definitely reach out to me if you want to explore this option in further detail.