Case Study: £40,000 Company Profit

April 6, 2025 • 7 min read

For a freelance consultant or side-hustle director, £40,000 is a common annual profit figure. At this level, you avoid the Higher Rate of tax entirely, making your strategy purely about minimizing Basic Rate and Corporation Tax liabilities.

This case study breaks down the exact math for the 2025/26 tax year, comparing the "Standard" approach to the "Sole Trader" alternative.

The Scenario

Company Revenue: £40,000.
Expenses: £0 (for simplicity).
Director: Single director, no other employees.
Goal: Maximize cash in pocket.

The Strategy: "Salary First, Dividends Second"

We will use the £12,570 Salary Strategy. Even though you are a Sole Director and cannot claim the Employment Allowance (meaning you pay £1,135 in Employer NICs), it is still mathematically superior to taking a lower salary because of the Corporation Tax relief.

Step 1: The Salary Deduction

Gross Salary: £12,570.
Employer NIC (15% on excess over £5,000): £1,135.50.
Total Cost to Company: £13,705.50.

Step 2: Corporation Tax

Original Profit: £40,000.
Less Salary Cost: -£13,705.50.
Taxable Profit: £26,294.50.
Corp Tax Rate: 19% (Small Profits Rate < £50k).
Tax Due: £26,294.50 * 19% = £4,996.

Step 3: Dividends

Distributable Profit: £26,294.50 - £4,996 = £21,298.
We declare a legal dividend of £21,298.

Step 4: Personal Tax Bill

Now we look at the Director's personal return.

Total Income: £12,570 (Salary) + £21,298 (Divs) = £33,868.
Personal Allowance: £12,570 (covers all Salary).
Dividend Allowance: First £500 is tax-free.
Taxable Dividends: £20,798.
Tax Band: All falls within the Basic Rate (£12,571 - £50,270).
Rate: 8.75%.
Tax Due: £20,798 * 8.75% = £1,820.

Final Result: Cash in Pocket

| Item | Amount | | :--- | :--- | | Salary Received | £12,570 | | Dividends Received | £21,298 | | Less: Personal Tax | -£1,820 | | Net Cash | £32,048 |

Total Tax Paid: £1,135 (ER NIC) + £4,996 (CT) + £1,820 (IT) = £7,951.
Effective Tax Rate: 19.88%.

Comparison: Sole Trader

If you were a Sole Trader making £40,000 profit:

Class 2 NIC: ~£0 (abolished/rolled in).
Class 4 NIC: 6% on profits between £12,570 and £50,270.
- (£40,000 - £12,570) * 6% = £1,645.
Income Tax: 20% on profits above £12,570.
- (£40,000 - £12,570) * 20% = £5,486.
Total Tax: £7,131.
Net Cash: £32,869.

Surprise Verdict: At £40k, the Sole Trader is actually slightly more efficient (~£800 better off) in 2025/26 due to the dividend tax and corporation tax combination. However, the Limited Company offers liability protection and better pension planning options which usually outweigh this small cash difference.