Tax implication for being a director and an employee?
Discussion
Here's the predicament:
I work for the family business and an opportunity has presented itself to enter a new market. What I want to do is invest in the new opportunity and create a new separate Ltd company. However I will still be working for the main family firm at the same time.
Does anyone know if this highly tax inefficient?
I would have thought the most tax effective way of doing this is to become director of both companies (alongside my father), but there a couple of reasons hindering this.
Another option I thought is to set up the new firm as a director (with my father also a director - Im not looking to shaft anyone in this plan!
), leave the 1st firm, but now work for them as some form of 'consultant', taking a fee/wage but sorting out tax/NIC myself under the new company.
Can anyone please advise what the tax implications are and whether my final thought is the best route to go down?
Thanks for your help...
I work for the family business and an opportunity has presented itself to enter a new market. What I want to do is invest in the new opportunity and create a new separate Ltd company. However I will still be working for the main family firm at the same time.
Does anyone know if this highly tax inefficient?
I would have thought the most tax effective way of doing this is to become director of both companies (alongside my father), but there a couple of reasons hindering this.
Another option I thought is to set up the new firm as a director (with my father also a director - Im not looking to shaft anyone in this plan!
), leave the 1st firm, but now work for them as some form of 'consultant', taking a fee/wage but sorting out tax/NIC myself under the new company.Can anyone please advise what the tax implications are and whether my final thought is the best route to go down?
Thanks for your help...
Directors are usually paid a salary for the work they carry out as a director. Therefore, any salary you receive from the company you set up would be taxed under the PAYE system. The salary would also be subject to National Insurance, both Employees and Employers.
How much PAYE and/or NI you would have to pay would depend on
a) what your current salary levels are from your existing PAYE job (PAYE)
b) total amount of salary paid from the new company (National Insurance)
As you will probably be the main (perhaps only) SHAREHOLDER opf your new company, you will have some scope to take money out of your own company in the form of dividends. This can be an efficient form of tax planning in that dividend do not attract an income tax charge until the recipent reaches the Higher Rate tax threshold (currently £43,875). Another advantage of dividends ios that they are not subject to any National Insurance charge.
Companies themselves pay Corporation Tax on their profits. Small companies (which yours probably will qualify as) pay Corporation Tax at 21% (20% from 1 April 2011) on profits up to £300,000.
One thing to watch out for - salary paid to directors is an allowable cost in calculating the company's taxable profit. Dividends are not treated as deductable costs.
How much PAYE and/or NI you would have to pay would depend on
a) what your current salary levels are from your existing PAYE job (PAYE)
b) total amount of salary paid from the new company (National Insurance)
As you will probably be the main (perhaps only) SHAREHOLDER opf your new company, you will have some scope to take money out of your own company in the form of dividends. This can be an efficient form of tax planning in that dividend do not attract an income tax charge until the recipent reaches the Higher Rate tax threshold (currently £43,875). Another advantage of dividends ios that they are not subject to any National Insurance charge.
Companies themselves pay Corporation Tax on their profits. Small companies (which yours probably will qualify as) pay Corporation Tax at 21% (20% from 1 April 2011) on profits up to £300,000.
One thing to watch out for - salary paid to directors is an allowable cost in calculating the company's taxable profit. Dividends are not treated as deductable costs.
Eric,
Thank you very much for your reply!
I gather from what you are saying then is that there isnt any disadvantage to being an employee and a director via increased taxes / NI etc.
But it would be more favourable again to be just a director at one firm I believe?
I think it will probably be best to speak to our accountants and see what they recommend.
Thanks for your input
Thank you very much for your reply!
I gather from what you are saying then is that there isnt any disadvantage to being an employee and a director via increased taxes / NI etc.
But it would be more favourable again to be just a director at one firm I believe?
I think it will probably be best to speak to our accountants and see what they recommend.
Thanks for your input
Call Maria at JMH Partnership -> http://www.jmhpartnership.com/
She is a great tax advisor and may be able to save you a bundle? I guess if you already have accountants, however she is a tax specialist and ex HMRC so should be able to get you something that is both moral and yet also efficient!
She is a great tax advisor and may be able to save you a bundle? I guess if you already have accountants, however she is a tax specialist and ex HMRC so should be able to get you something that is both moral and yet also efficient!
D4SH said:
Eric,
Thank you very much for your reply!
I gather from what you are saying then is that there isnt any disadvantage to being an employee and a director via increased taxes / NI etc.
None other than the fact that the more income you receieve the more likely you are to pay more tax. However, being a director of your own company does give you some flexibility in how you chose to remunerate yourself from that company - which can help in mitigating tax and NI liabilities.
But it would be more favourable again to be just a director at one firm I believe?
Perhaps - it depends on what your current employer would be happy to do. At the moment you are an employee of someone else's business. There is a possibility that you could resign from that position and then use your new company to bill your former employer for outside consultancy work. Once the income comes into your own company, you then can decide in what form you want to draw that money out for yourself - either as a dividend or salary - or possibly not to pull it out at all - or use the funds to pay into a company pension scheme. There are quite a few choices available.
The big problem with billing your former employer is the risk of having to apply IR35 rules to that particular tranche of income. If IR35 did apply, then much of the advantages of procesing that income through your own company would be lost.
I think it will probably be best to speak to our accountants and see what they recommend.
A good idea.
Thanks for your input
Thank you very much for your reply!
I gather from what you are saying then is that there isnt any disadvantage to being an employee and a director via increased taxes / NI etc.
None other than the fact that the more income you receieve the more likely you are to pay more tax. However, being a director of your own company does give you some flexibility in how you chose to remunerate yourself from that company - which can help in mitigating tax and NI liabilities.
But it would be more favourable again to be just a director at one firm I believe?
Perhaps - it depends on what your current employer would be happy to do. At the moment you are an employee of someone else's business. There is a possibility that you could resign from that position and then use your new company to bill your former employer for outside consultancy work. Once the income comes into your own company, you then can decide in what form you want to draw that money out for yourself - either as a dividend or salary - or possibly not to pull it out at all - or use the funds to pay into a company pension scheme. There are quite a few choices available.
The big problem with billing your former employer is the risk of having to apply IR35 rules to that particular tranche of income. If IR35 did apply, then much of the advantages of procesing that income through your own company would be lost.
I think it will probably be best to speak to our accountants and see what they recommend.
A good idea.
Thanks for your input
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