To be Limited or not to be Limited, that is the question!
It's THE question that baffles the clients in the tax world. So someone says "you should go Limited!"
I hear all sorts of replies / stories, mostly starting off with "my mate said" .........
"Ohhh, nooo don't do that" "I don't pay any tax at all" "Your accoutant's only said that to raise the fees with you" "So I have to employ someone to do my record keeping now" "I'm too small for that" "My friend went Limited and went bust" "I dont have a secretary" "You can't run a company, you're not organised enough" "The corporate world is too scary, stay as a sole trader"
I'm going to breifly outline (in my opinion) what the FINANCIAL perks of trading as a company are (example based on an owner managed business - income streams of salary and dividends only from said company).
> as a director of a limited company, pay yourself a salary - just enough to click you into 1a National Insurance contributions. This will keep your state pension entitlement in tact in full (pension credits are available at a lower income instead).
> Eliminate your class 2 national insurance bills. Currently £137.80 per annum. Class 4 national insurance due at 9% of profit after the lower earnings limit has also disappeared.
If you are a sole trader and you are paying class 4 national insurance over £2.5k - have a word with your accountant
> Don't forget - the salary, along with the national insurance contributions and the payroll fees are tax deductible
> The company pays 20% corporation tax (based on the small companies rate) - sole traders have the extra 9% Class 4 national insurance bill
> With a PAYE salary of £8000 during 2012/13 you can withdraw around £30k from your company as net dividends without having to make an additional payment of personal tax to HMRC. Just be wary of taxable benefits and their implications (more below)
There are certain conditions though - always seek advice before you even set a limited company up. Even getting the share information wrong can be costly to fix.
> You mustn't draw out more money than what the company has available for the director(s). There are consequences for withdrawing what's called an 'illegal' dividend. The amounts must be repaid within 9 months of your year end. Always ensure to get your accounts to your accountant beforeyour end of year... What harm could it do?
> You must be trading though a Limited Company bank account (May I suggest Natwest for the smoothest transition)
> You must declare your salary through a PAYE scheme weekly/monthly (this is referred to as the Real Time Inforamtion system [RTI]) any benefits in kind must be declared to HMRC. A benefit in kind is where an employee has received the benefit of something personally. This could range from a mobile phone contract, a company car/fuel or a medical benefit. There's an extensive list here http://www.hmrc.gov.uk/payerti/index.htm
> Please note that there is no year end submission for PAYE moving forward.
> You must submit an annual return to Companies House. This is a summary of any changes to the company during the year. Companies House charge £13 to submit this online.
There's a lot more to discuss but here is the basic outline above....... of course there's more to it, but each business is different and therefore any advice for Incoporating must be tailored, which is why it's so difficult to find clear information on the internet. It just doesn't exist.
Taxswag