Question for business owners: Paying yourself and tax
Discussion
I've accumulated enough capital to start my own small business, just toying with the idea at the moment, nowhere near a ribbon cutting ceremony with Timmy Mallet just yet, but I've a question... are these steps correct?
Step 1: You put your cash into a business bank account
Step 2: Everyone works
Step 3: You pay the staff and yourself
Step 4: Everyone pays tax
Is that how the system works? You're taxed when trying to pay yourself your own money? Or does the system have a smidgen of fairness, allowing oneself to be paid, free from taxation, until the initial capital has been reimbursed? I'm guessing it's the latter, otherwise nobody would bother, but thought best to double check on PH, as this government aren't exactly renowned for their fairness with the business owners.
Cheers in advance.
Step 1: You put your cash into a business bank account
Step 2: Everyone works
Step 3: You pay the staff and yourself
Step 4: Everyone pays tax
Is that how the system works? You're taxed when trying to pay yourself your own money? Or does the system have a smidgen of fairness, allowing oneself to be paid, free from taxation, until the initial capital has been reimbursed? I'm guessing it's the latter, otherwise nobody would bother, but thought best to double check on PH, as this government aren't exactly renowned for their fairness with the business owners.
Cheers in advance.
marvelharvey said:
I've accumulated enough capital to start my own small business, just toying with the idea at the moment, nowhere near a ribbon cutting ceremony with Timmy Mallet just yet, but I've a question... are these steps correct?
Step 1: You put your cash into a business bank account
Step 2: Everyone works
Step 3: You pay the staff and yourself
Step 4: Everyone pays tax
Is that how the system works? You're taxed when trying to pay yourself your own money? Or does the system have a smidgen of fairness, allowing oneself to be paid, free from taxation, until the initial capital has been reimbursed? I'm guessing it's the latter, otherwise nobody would bother, but thought best to double check on PH, as this government aren't exactly renowned for their fairness with the business owners.
Cheers in advance.
In simple terms any money you invest in the company can be credited to what's called a directors loan account. Money from that can be removed whenever you like and it's tax free as it is your money. You can also charge your company interest on any funds that you lend (normally base rate + a few % but nothing too silly Step 1: You put your cash into a business bank account
Step 2: Everyone works
Step 3: You pay the staff and yourself
Step 4: Everyone pays tax
Is that how the system works? You're taxed when trying to pay yourself your own money? Or does the system have a smidgen of fairness, allowing oneself to be paid, free from taxation, until the initial capital has been reimbursed? I'm guessing it's the latter, otherwise nobody would bother, but thought best to double check on PH, as this government aren't exactly renowned for their fairness with the business owners.
Cheers in advance.
)Once that has gone, or should you pay yourself a salary, that is taxed through PAYE at the rate set by your code. Should the company be making lots of money and in profit, you can pay yourself a very low salary (normally just sufficient to be under the employees NI threshold) and then pay yourself a dividend either monthly, quarterly or yearly (I pay mine monthly and it works very well
). In order to pay a dividend, the company has to be in a position where profits are being made - very much the case if you wish to do this monthly otherwise you are committing an offence (as far as I'm aware)If I've either mislead you or forgotten anything I'm sure Eric will be along shortly to advise.
Good luck with the new venture
Although there are advantages to having a company status (like paying yourself in share dividends) it brings with it aditional costs and responsibilities. My accountant fees almost tripled when we incorporated, and I have the monthly PAYE to do , even thouigh there are just 2 of us. I also have the annual returns as an employer to make to the tax man (companies house returns too). Alos Darling has been slowly edging up the corporation tax becauise he hates the share dividend thing and has been rargher unkind to the two man band to take revenge for having lost a court case ( Artic Systems?).
If you don't incoporate it is probably still good practice to keep your money and business money in seprate acounts, but as 'self employed' you then declare profits and pay tax at the year end on a self assessment. You don't get the PAYE to do or all the paper shuffling, but the liability is yours: if your business goes t1t5 up creditors can seek your personal assets whereas a company is limited to the value of the business.
The PAYE isn't that hard for a few people with simple tax affairs ( we pay ourselves £400- £500 a month, so no PAYE or Ni to mess with). We then pay ourselves in annual share dividends each April, but that requires you to be able to survive the year and I think monthly or quarterly dividends are best for the first few years. I use the paper record sheets and the PAYE tax calculator CD which HMRC provide. I do the annual returns online, quarterly VAT online, companies house stuff online. You soon get used to it.
There must be a critical time when it is best to incorporate but that is far less clear cut than it was. Liability tends to be a key isue for most peoploe. If your potenmtial business failire could be some great that it could lead to you losing your house; incorporate IMHO.
It's also worth noting that if you decide to stay S/E and can grow a business for sufficient years to be worth something, you can then incorporate it and sell the goodwill to the new limited company which currently is a very good tax efficient way of extracting money tax efficiently out of your company. The sales figure is based on the average of a given number of years profit (mine was 4 years) and you then pay 10% tax on that figure. That agreed value is then credited to your directors loan and you then have a decent tax free source of income for as long as it takes to remove it. I am sure that this little loop hole will be closed in the near future so it's worth investigating sooner rather than later.
This worked for me, I had traded for 7 years as a S/E business (with staff) and my tax bills were huge (eye watering!) bear in mind as said, you pay tax on all profits after costs at the prevailing rate. I had and still have no liabilities but the limited route has reduced my yearly tax bill by enough to reduce the national debt of Chile
It really depends how big your business is going to be, £60k T/O with £30k profits are ideal to be S/E maybe even slightly more but £1.2m with over £500k nett profit self employed businesses aren't ideal and there are more tax efficient ways to operate
I would suggest you also book an appointment to visit and discuss your plans with a account who has a firm grip on the latest accounting practices. If you are in the South East UK I would be happy to pm details of those who have helped me if that would help?
This worked for me, I had traded for 7 years as a S/E business (with staff) and my tax bills were huge (eye watering!) bear in mind as said, you pay tax on all profits after costs at the prevailing rate. I had and still have no liabilities but the limited route has reduced my yearly tax bill by enough to reduce the national debt of Chile
It really depends how big your business is going to be, £60k T/O with £30k profits are ideal to be S/E maybe even slightly more but £1.2m with over £500k nett profit self employed businesses aren't ideal and there are more tax efficient ways to operate
I would suggest you also book an appointment to visit and discuss your plans with a account who has a firm grip on the latest accounting practices. If you are in the South East UK I would be happy to pm details of those who have helped me if that would help?
Most people (but not all) start running their businesses as "sole traders" rather than through a limited company. As has been already mentioned, sole traders pay tax on the business profits generated by their trading activity. They do not pay tax on the amounts of money they draw out of the business. For example, if a business made a profit of £20,000 but the trader had only drawn out £15,000 to live off, he will be taxed on the full £20,000.
With a limited company, the owner/managers (i.e shareholder/director) pays personal Income tax on what they pull out of the company for themselves. The way and how much tax they pay will depend on how much they pull out in the form of salary (which is subject to PAYE and NI) and/or dividends, which are subject to Income Tax only.
It needs to be remembered that limited companies have their own tax on profits to pay, Corporation Tax. This is charged on the business profits of the company which at the moment amounts to 21% for small companies. The business profits are those profits remaining after all salaries ( both employees' and directors') are deducted but BEFORE dividends are deducted.
With a limited company, the owner/managers (i.e shareholder/director) pays personal Income tax on what they pull out of the company for themselves. The way and how much tax they pay will depend on how much they pull out in the form of salary (which is subject to PAYE and NI) and/or dividends, which are subject to Income Tax only.
It needs to be remembered that limited companies have their own tax on profits to pay, Corporation Tax. This is charged on the business profits of the company which at the moment amounts to 21% for small companies. The business profits are those profits remaining after all salaries ( both employees' and directors') are deducted but BEFORE dividends are deducted.
Gassing Station | Business | Top of Page | What's New | My Stuff