Running a Ltd Co part time - & tax, NI etc
Discussion
I am due to leave my current employ in August, but there is a possibility that my contract may be extended by two years. I haven't decided whether to take this or not.
I run a small part time business as a sole trader, but all my profits on that are taxed at the higher rate as they sit on top of my 'day job' earnings. Would there be any tax advantages if I were to incorporate? And is there anything preventing me from doing this while still in employment? My current employers (ultimately HMG) are happy with this provided certain conditions are met.
I run a small part time business as a sole trader, but all my profits on that are taxed at the higher rate as they sit on top of my 'day job' earnings. Would there be any tax advantages if I were to incorporate? And is there anything preventing me from doing this while still in employment? My current employers (ultimately HMG) are happy with this provided certain conditions are met.
No legal reasons why you can't operate as a limited company.
Once you start running a limited company you need to be aware of the following -
the company will pay Corporation Tax (currently 21%) on its business profits
you will pay PAYE and Class 1 NI (employee's and employer's) on your salary from the company
you may pay Income Tax (but no NI) on any dividends drawn from the company.
Salary counts as an allowable cost when arriving at the company's profit for Corporation Tax purposes, Dividends do not.
Normally, many directors draw a mininmal salary from the company to minimise the amount of PAYE and NI arising. Some might even only pay themselves up to the Lower Earnings Limit for NI pyurposes (currently £5,720 per anum). They will take the rest through dividends, which have favourable Income Tax rules and are not liable to NI at all.
In your situation, as you already have a PAYE job elewhere, your personal tax allowances will already be used up by your current employment. This means that ANY salary drawn from the company will be subject to PAYE. If the company salary remains below £5,720, you will not be subject to NI, however.
Once you start running a limited company you need to be aware of the following -
the company will pay Corporation Tax (currently 21%) on its business profits
you will pay PAYE and Class 1 NI (employee's and employer's) on your salary from the company
you may pay Income Tax (but no NI) on any dividends drawn from the company.
Salary counts as an allowable cost when arriving at the company's profit for Corporation Tax purposes, Dividends do not.
Normally, many directors draw a mininmal salary from the company to minimise the amount of PAYE and NI arising. Some might even only pay themselves up to the Lower Earnings Limit for NI pyurposes (currently £5,720 per anum). They will take the rest through dividends, which have favourable Income Tax rules and are not liable to NI at all.
In your situation, as you already have a PAYE job elewhere, your personal tax allowances will already be used up by your current employment. This means that ANY salary drawn from the company will be subject to PAYE. If the company salary remains below £5,720, you will not be subject to NI, however.
I'm in a similar situation and are considering my options. The only thing that really puts me off from incorporating is the relatively high cost of accounting for a Ltd co, compared to a sole trader.
As a sole trader I can currently do the books myself and submit a self assessment. If incorporated there would need to be an accountant involved. For the sake of a tax bill of around £1000 (paid at 40%), the savings of going limited would not currently outweigh the extra cost of accounting.
As a sole trader I can currently do the books myself and submit a self assessment. If incorporated there would need to be an accountant involved. For the sake of a tax bill of around £1000 (paid at 40%), the savings of going limited would not currently outweigh the extra cost of accounting.
BruceV8 said:
Do I have to take a salary at all? As I have my main salary, is it allowable to simply pay myself by dividends?
Apololgies if this is all basic stuff to you all, but this a steep learning curve for me.
No obligation to pay yourself a salary (the National Minimum Wages rules do not apply to directors of owner managed businesses).Apololgies if this is all basic stuff to you all, but this a steep learning curve for me.
However, there are legfal restrictions surrounding the payment of dividends so one needs to be aware of these before committing to paying a dicvidend.
As for accounting fees - these can be well worthwhile if the accountant can save you thousands in tax.
Right then. Final daft question for now - the results of which should swing it for me: What can I expect to pay in accountancy fees? It will be a very small company and, if it stays part time, turnover probably won't exceed the VAT threshold - in the first year at least. The only PAYE, if any, will be me.
To some extent, it will depend on the work you want the accountant to do and the satnadrd of record keeping provided to the accountant.
For a basic service i.e. -
completion of anual accounts in statutory formats (full and abbreviated)
calculation of Corporation Tax liability, completion of Corporation Tax return and submission of the accounts and returns to HMRC.
submission of abbreviated accounts to Companies House
I would suggest a fee of around £600.
For a basic service i.e. -
completion of anual accounts in statutory formats (full and abbreviated)
calculation of Corporation Tax liability, completion of Corporation Tax return and submission of the accounts and returns to HMRC.
submission of abbreviated accounts to Companies House
I would suggest a fee of around £600.
Edited by Eric Mc on Wednesday 31st March 10:53
Eric Mc said:
However, there are legal restrictions surrounding the payment of dividends so one needs to be aware of these before committing to paying a dividend.
In the OP's example of working a PAYE job to the 40% threshold, then just paying yourself dividend from your own part time Ltd co what legal restrictions would apply?jon- said:
Eric Mc said:
However, there are legal restrictions surrounding the payment of dividends so one needs to be aware of these before committing to paying a dividend.
In the OP's example of working a PAYE job to the 40% threshold, then just paying yourself dividend from your own part time Ltd co what legal restrictions would apply?A company must pay dividends to all the shareholders, although a shareholder has the right to waive a dividend.
A company must maintain the correct paperwork supporting dividend decisions - such as management accounts, minutes of meetings and dividend vouchers.
If a taxpayer is already a higher rate taxpayer, then any additional amounts drawn in the form of dividends will be subject to Higher Rate Tax too (although dividends have a special higher rate tax of 32.5%, not 40%).
Eric Mc said:
jon- said:
Eric Mc said:
However, there are legal restrictions surrounding the payment of dividends so one needs to be aware of these before committing to paying a dividend.
In the OP's example of working a PAYE job to the 40% threshold, then just paying yourself dividend from your own part time Ltd co what legal restrictions would apply?A company must pay dividends to all the shareholders, although a shareholder has the right to waive a dividend.
A company must maintain the correct paperwork supporting dividend decisions - such as management accounts, minutes of meetings and dividend vouchers.
If a taxpayer is already a higher rate taxpayer, then any additional amounts drawn in the form of dividends will be subject to Higher Rate Tax too (although dividends have a special higher rate tax of 32.5%, not 40%).
You will NEVER pay NI on a dividend. When you consider that Employee's Class 1 NI is 11% on earnings over £5,720 and Employer's Class 1 NIC is 12.8%, (totalling 23.8%), then you can see that taking the option of dividends can be hugely beneficial.
Obviously, HMRC do have some weapons they can deploy to override dividend payments to director/shareholders such as IR35, but IR35 is liimited in scope and any bona fide trading company has very little to fear from IR35.
Obviously, HMRC do have some weapons they can deploy to override dividend payments to director/shareholders such as IR35, but IR35 is liimited in scope and any bona fide trading company has very little to fear from IR35.
Eric Mc said:
You will NEVER pay NI on a dividend. When you consider that Employee's Class 1 NI is 11% on earnings over £5,720 and Employer's Class 1 NIC is 12.8%, (totalling 23.8%), then you can see that taking the option of dividends can be hugely beneficial.
Obviously, HMRC do have some weapons they can deploy to override dividend payments to director/shareholders such as IR35, but IR35 is liimited in scope and any bona fide trading company has very little to fear from IR35.
I see your point, that's a massive cost I'd not concidered, but for the OP (and myself) who's profit would likely fall below the NI threshold, from what I understand you're effectively looking at 40% or 32.5% plus accountant fees. Is this (simplistic) understanding correct?Obviously, HMRC do have some weapons they can deploy to override dividend payments to director/shareholders such as IR35, but IR35 is liimited in scope and any bona fide trading company has very little to fear from IR35.
Edited by jon- on Wednesday 31st March 12:05
Wow, there really is no good way of minimising tax for those of us in full time employment with part time work on the side (other than dual purpose AIA purchases etc).
Thank-you once again for the advice Eric. I think we should have a "Pistonheads Business Knees Up" night where everyone who owes you a drink, buys you a drink. You'll have enough beer to fill a swimming pool!
Thank-you once again for the advice Eric. I think we should have a "Pistonheads Business Knees Up" night where everyone who owes you a drink, buys you a drink. You'll have enough beer to fill a swimming pool!
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