becoming a limited company
Discussion
i have a small paving/landscape company and within the next few mths i,ll be becoming vat registered.things seem to be picking up now in general for me(thanks partially to ph :-)and its looking like my years of hard work and struggling is potentially becoming a proper company and not just a couple of jobs here and there.
obviously i need to see my accountant but i,ve been told that if i become a ltd company i can pay myself a wage(under the 40% threshold) get taxed the 20% and then leave the rest in the company and take a dividend payment(i think its that) at the end of the year and pay 20% on that instead of just taking what the company brings in and paying 40%
am i right or miles away from the truth
obviously i need to see my accountant but i,ve been told that if i become a ltd company i can pay myself a wage(under the 40% threshold) get taxed the 20% and then leave the rest in the company and take a dividend payment(i think its that) at the end of the year and pay 20% on that instead of just taking what the company brings in and paying 40%
am i right or miles away from the truth
Whoa...
Big subject. Firstly, there is an important difference, you cannot, technically become a company. However, you can create a Limited Company which is a completely different entity to you. However, you would be a director of it and you then can get paid a wage like anyone else, however as you own the company you can choose to also pay yourself a dividend from profits.
Basically, it is possible to pay yourself but technically circumnavigate paying employers and employees NI contributions. For example, you could pay yourself just on the tax allowance amount, and get this tax free. The from profits you can pay yourself a dividend though a rather convoluted system of 'credits' that seemingly only a guy called EricMc understands!
The drawbacks of being a Ltd Co is that your standard of accounting and supplying accounts in general is higher. Unless you have specific training and experience in this, this is without a doubt the job of an accountant to submit your tax returns and accounts for Companies House.
Big subject. Firstly, there is an important difference, you cannot, technically become a company. However, you can create a Limited Company which is a completely different entity to you. However, you would be a director of it and you then can get paid a wage like anyone else, however as you own the company you can choose to also pay yourself a dividend from profits.
Basically, it is possible to pay yourself but technically circumnavigate paying employers and employees NI contributions. For example, you could pay yourself just on the tax allowance amount, and get this tax free. The from profits you can pay yourself a dividend though a rather convoluted system of 'credits' that seemingly only a guy called EricMc understands!
The drawbacks of being a Ltd Co is that your standard of accounting and supplying accounts in general is higher. Unless you have specific training and experience in this, this is without a doubt the job of an accountant to submit your tax returns and accounts for Companies House.
....yes you will need an accountant (and not are all give the high level of advice that Eric seems to provide so readily)..but if you have a modicum of common sense then you will be able to do the basic book keeping with little more than an excel spreadsheet and a some discipline to keep sthings organised...
Running your business through a limited company does place additional burdens of respnsibility on you as the proprietor of that business.
Essentially, these aditional duties and responsibilities are imposed as the price paid for the legal benefits to be obtained through having limited liability status.
Limited company accounts are much more sophisticated compared to those of a similar sized sole-trader. However, the basic book-keeping required by the proprietor remains much the same. The accountant usually takes on the task of converting the basic books and records provided by the owner of the business into legally compliant statutory accounts.
The way the business and its proprietor are taxed is very different compared to a sole tradership.
The company is taxed on its net profit - suitably adjusted for Capital Allowance claims etc and tax is charged at Corporation Tax rates. The current rate for small companies is 20% but that is increasing over the next two years to 22%.
The individuals in the business are taxed on what they personally take out of the company. This is usually a combination of salaries and dividends.
Salaries are taxed and NI'd in the normal way (through the PAYE system - which means, of course, that the company has to register for PAYE.
Dividends are taxed through the Self Assessment system.
Depending on the state of the company's accumulated profits and balance sheet situation, there can often be restrictions placed on the size of dividends legally permissable. Paying a dividend is not always an option.
There are many PAYE related pitfalls waiting to catch out directors of limited companies.
Care has to be taken in ensuring that expenses paid to directors are properly recorded and disclosed.
Details of expenses paid on behalf of the company out of the director's own pocket must also be maintained and disclosed.
Directors also need to keep a careful eye on their "loan" relationship with their own company, especially if they have "borrowed" money in any way. There are both PAYE and Companies Act disclosure requirements surrounding such director's loans. There are also "penal" Corporation Tax charges levied on companies when such loans remain due to the company at 31 March each year.
Running a company does make life a lot trickier than running a sole-tradership. However, your accountant is there to make sure you stay on the straight and narrow.
Essentially, these aditional duties and responsibilities are imposed as the price paid for the legal benefits to be obtained through having limited liability status.
Limited company accounts are much more sophisticated compared to those of a similar sized sole-trader. However, the basic book-keeping required by the proprietor remains much the same. The accountant usually takes on the task of converting the basic books and records provided by the owner of the business into legally compliant statutory accounts.
The way the business and its proprietor are taxed is very different compared to a sole tradership.
The company is taxed on its net profit - suitably adjusted for Capital Allowance claims etc and tax is charged at Corporation Tax rates. The current rate for small companies is 20% but that is increasing over the next two years to 22%.
The individuals in the business are taxed on what they personally take out of the company. This is usually a combination of salaries and dividends.
Salaries are taxed and NI'd in the normal way (through the PAYE system - which means, of course, that the company has to register for PAYE.
Dividends are taxed through the Self Assessment system.
Depending on the state of the company's accumulated profits and balance sheet situation, there can often be restrictions placed on the size of dividends legally permissable. Paying a dividend is not always an option.
There are many PAYE related pitfalls waiting to catch out directors of limited companies.
Care has to be taken in ensuring that expenses paid to directors are properly recorded and disclosed.
Details of expenses paid on behalf of the company out of the director's own pocket must also be maintained and disclosed.
Directors also need to keep a careful eye on their "loan" relationship with their own company, especially if they have "borrowed" money in any way. There are both PAYE and Companies Act disclosure requirements surrounding such director's loans. There are also "penal" Corporation Tax charges levied on companies when such loans remain due to the company at 31 March each year.
Running a company does make life a lot trickier than running a sole-tradership. However, your accountant is there to make sure you stay on the straight and narrow.
wow many thanks for the helpful reply.i do have a good accountant so thats a good start.
bascially i suppose i,m asking if for example i owned my own limited company i can
pay myself say 36k a year and be taxed 20%
then take a dividend payment at the end of the year for say 25k and be taxed 20% or soon to be 22%
surely even with the added complications of additional accountancy its better than paying 40% on over 37k?
plus i have the advantage of having a relativley simple buisness.doubt i will ever employ more than 4 people (unless i,m really lucky) who will all be subcontractors and not paye. i,ve got one sub contractor now who does occasional work for me.I simply can not employ people paye.Too many idiots and not enough skilled workers will i imagine see me having different people all the time.
bascially i suppose i,m asking if for example i owned my own limited company i can
pay myself say 36k a year and be taxed 20%
then take a dividend payment at the end of the year for say 25k and be taxed 20% or soon to be 22%
surely even with the added complications of additional accountancy its better than paying 40% on over 37k?
plus i have the advantage of having a relativley simple buisness.doubt i will ever employ more than 4 people (unless i,m really lucky) who will all be subcontractors and not paye. i,ve got one sub contractor now who does occasional work for me.I simply can not employ people paye.Too many idiots and not enough skilled workers will i imagine see me having different people all the time.
You never "employ" sub-contractors 
Your understanding of the tax on your income from the company is rather muddled and you need to talk to your accountant so that you can clarify in your mind the implications of taking both salary AND dividends from your own company.
The calculations are quite comlicated, especially when your combined salary/dividend income is sufficient to put you into the higher rate tax bracket. Dividends are not immune from higher rate taxation and you certainly will pay more than 22% income tax if you start taking out large amounts.
You must also bear in mind that there are legal and tax restrictions on the amount of dividend that can be paid from a company in any given year.
Your understanding of the tax on your income from the company is rather muddled and you need to talk to your accountant so that you can clarify in your mind the implications of taking both salary AND dividends from your own company.
The calculations are quite comlicated, especially when your combined salary/dividend income is sufficient to put you into the higher rate tax bracket. Dividends are not immune from higher rate taxation and you certainly will pay more than 22% income tax if you start taking out large amounts.
You must also bear in mind that there are legal and tax restrictions on the amount of dividend that can be paid from a company in any given year.
You cannot pay a dividend if the company is insolvent or there are insuffiocient reserves/accumulated profits.
Dividends are paid on the basis of the shareholdings in the company. If you want to pay yourself a dividend, you will also need to pay a dividend to the other shareholders too - in proportion to thier releavnt shareholdings. You can get out of having to pay dividends to the other shareholders if they agree to waive the right to the dividends.
Dividends should always be supported by the issuing of Dividend Vouchers (including the relevant Tax Credits) and the decision to pay a dividend should be minuted by the directors.
The Revenue can disaallow a dividend if they cannot see documentary evidence that a proper "dividend" decision was made by the board.
Dividends are paid on the basis of the shareholdings in the company. If you want to pay yourself a dividend, you will also need to pay a dividend to the other shareholders too - in proportion to thier releavnt shareholdings. You can get out of having to pay dividends to the other shareholders if they agree to waive the right to the dividends.
Dividends should always be supported by the issuing of Dividend Vouchers (including the relevant Tax Credits) and the decision to pay a dividend should be minuted by the directors.
The Revenue can disaallow a dividend if they cannot see documentary evidence that a proper "dividend" decision was made by the board.
If you are the only shareholder then the entire dividend paid out by the company will go to you.
If the company has £20,000 Profit at the year end, in theory, it could pay most of that in dividend. However, you must be sure that there is enough money left in the company's to enable the company to pay the Corporation Tax (CT) liability generated by a profit of £20,000. At current CT rates (20%), this would mean that the company would need to pay £4,000 to HMRC. That would leave only £16,000 available to be paid out in dividends (dividends are always paid out of "after-tax profits" ).
You will be personally liable to Income Tax on that dividend.
Dividends are "deemed" to be paid to the individual net of tax at 10%. This means that a £16,000 "Net" dividend actually equates to a "Gross" dividend of £17,777.78.
If your only income for the year was this dividend, then the Revenue will not ask for any "further" tax to be paid on the £17,777.78.
However, if you had other income (such as a salary) and your combined income from all sources put you into the higher rate tax brackets, you could end up paying almost £6,000 tax on your £16,000 net dividend.
So, as I said previously, the situation is not as simple or as straightforward as some people might think.
If the company has £20,000 Profit at the year end, in theory, it could pay most of that in dividend. However, you must be sure that there is enough money left in the company's to enable the company to pay the Corporation Tax (CT) liability generated by a profit of £20,000. At current CT rates (20%), this would mean that the company would need to pay £4,000 to HMRC. That would leave only £16,000 available to be paid out in dividends (dividends are always paid out of "after-tax profits" ).
You will be personally liable to Income Tax on that dividend.
Dividends are "deemed" to be paid to the individual net of tax at 10%. This means that a £16,000 "Net" dividend actually equates to a "Gross" dividend of £17,777.78.
If your only income for the year was this dividend, then the Revenue will not ask for any "further" tax to be paid on the £17,777.78.
However, if you had other income (such as a salary) and your combined income from all sources put you into the higher rate tax brackets, you could end up paying almost £6,000 tax on your £16,000 net dividend.
So, as I said previously, the situation is not as simple or as straightforward as some people might think.
Edited by Eric Mc on Tuesday 19th February 18:24
Eric Mc said:
You cannot pay a dividend if the company is insolvent or there are insuffiocient reserves/accumulated profits.
Dividends are paid on the basis of the shareholdings in the company. If you want to pay yourself a dividend, you will also need to pay a dividend to the other shareholders too - in proportion to thier releavnt shareholdings. You can get out of having to pay dividends to the other shareholders if they agree to waive the right to the dividends.
Dividends should always be supported by the issuing of Dividend Vouchers (including the relevant Tax Credits) and the decision to pay a dividend should be minuted by the directors.
The Revenue can disaallow a dividend if they cannot see documentary evidence that a proper "dividend" decision was made by the board.
So if other shareholders waive their right to the dividends, must the balance be redressed at some point in the future? For what reason would a shareholder waive their right? As this seems like it could lead to trouble about income-splitting etc?Dividends are paid on the basis of the shareholdings in the company. If you want to pay yourself a dividend, you will also need to pay a dividend to the other shareholders too - in proportion to thier releavnt shareholdings. You can get out of having to pay dividends to the other shareholders if they agree to waive the right to the dividends.
Dividends should always be supported by the issuing of Dividend Vouchers (including the relevant Tax Credits) and the decision to pay a dividend should be minuted by the directors.
The Revenue can disaallow a dividend if they cannot see documentary evidence that a proper "dividend" decision was made by the board.
Seany88 said:
Eric Mc said:
You cannot pay a dividend if the company is insolvent or there are insuffiocient reserves/accumulated profits.
Dividends are paid on the basis of the shareholdings in the company. If you want to pay yourself a dividend, you will also need to pay a dividend to the other shareholders too - in proportion to thier releavnt shareholdings. You can get out of having to pay dividends to the other shareholders if they agree to waive the right to the dividends.
Dividends should always be supported by the issuing of Dividend Vouchers (including the relevant Tax Credits) and the decision to pay a dividend should be minuted by the directors.
The Revenue can disaallow a dividend if they cannot see documentary evidence that a proper "dividend" decision was made by the board.
So if other shareholders waive their right to the dividends, must the balance be redressed at some point in the future? For what reason would a shareholder waive their right? As this seems like it could lead to trouble about income-splitting etc?Dividends are paid on the basis of the shareholdings in the company. If you want to pay yourself a dividend, you will also need to pay a dividend to the other shareholders too - in proportion to thier releavnt shareholdings. You can get out of having to pay dividends to the other shareholders if they agree to waive the right to the dividends.
Dividends should always be supported by the issuing of Dividend Vouchers (including the relevant Tax Credits) and the decision to pay a dividend should be minuted by the directors.
The Revenue can disaallow a dividend if they cannot see documentary evidence that a proper "dividend" decision was made by the board.
Regarding income splitting, when someone waive's a right to a dividend, you are more than likely ENSURING that income isn't being split - so it's less likely that the Revenue will object.
As with everything to do with dividends, documentary evidence of any such waivers should be kept in order to prove that the waiver is bona fide.
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