Setting up a ltd company.

[Night blaster]

Night Blaster: I may have misunderstood, but have you covered personal income tax in your limited company example? If you pay yourself in dividends they are paid out of company profit after corporation tax.

 

Most one-man-bands I know who use the Limited Company option make a saving on national insurance (not payable on dividends) and enjoy the protection of the legal entity which is the Company. The NI saving is worthwhile if you're a very small business. If you get any scale, you need to stop sweating the small stuff.

 

To the OP: just go see a decent accountant. This is not something you either want or need to do yourself - your time is better spent generating the income.

 

This gets a bit complicated

 

You would pay personal tax if you set you salary higher than the tax allowance but this would be @ 20% same as corporation tax (therefore nothing gained or lost), but this would also attract NI deductions which is costly. Not a bad idea to pay some NI but with employers NI at 13.8% & Employee's NI @ 12% the limited company tax savings can be lost by putting through a salary that is too high. I usually recommend 12k per annum this satisfies minimum wage requirements (37.5hrs per week @ minimum wage £6.19)

 

I mention minimum wage as it has come up in the last 3 of my tax investigations that i have handled, so inspectors are wise to the tax dodge, as a director you are an employee so therefore subjected to employment law which will state minimum wage at the rate set by our government. (it is hard for them to prove hours actually worked in most cases)

 

The other case you would pay personal tax on earning from a company would be if your total personal earnings amount to more than 43k ish which would mean you are a 40% tax payer and would have to make up the extra tax. an Extra 22.5%

 

If you are below this figure dividends carry a tax credit so if you actually receive a £9000 dividend it is deemed as £10000 dividend with £1000 tax credit having been paid as part of the corporation tax bill. Therefore you have technically paid any tax on the dividend already (similar to interest from the Bank usually paid Net of tax))

 

Hope this puts a few things straight, and yes dividends are paid after corp tax.

 

Cheers

 

NB

[Chris Bb]

I have only gone ltd twice and that was purely for protection from business risks beyond issued share capital

I went this way many years ago for the same reasons.

 

Unfortunately, today, directors of a limited company can be sued personally so you don't have that protection anymore.

[chady]

Well sounds like you know what your doing you have a pm mate thanks

 

Jamie

 

 

 

This gets a bit complicated

 

You would pay personal tax if you set you salary higher than the tax allowance but this would be @ 20% same as corporation tax (therefore nothing gained or lost), but this would also attract NI deductions which is costly. Not a bad idea to pay some NI but with employers NI at 13.8% & Employee's NI @ 12% the limited company tax savings can be lost by putting through a salary that is too high. I usually recommend 12k per annum this satisfies minimum wage requirements (37.5hrs per week @ minimum wage £6.19)

 

I mention minimum wage as it has come up in the last 3 of my tax investigations that i have handled, so inspectors are wise to the tax dodge, as a director you are an employee so therefore subjected to employment law which will state minimum wage at the rate set by our government. (it is hard for them to prove hours actually worked in most cases)

 

The other case you would pay personal tax on earning from a company would be if your total personal earnings amount to more than 43k ish which would mean you are a 40% tax payer and would have to make up the extra tax. an Extra 22.5%

 

If you are below this figure dividends carry a tax credit so if you actually receive a £9000 dividend it is deemed as £10000 dividend with £1000 tax credit having been paid as part of the corporation tax bill. Therefore you have technically paid any tax on the dividend already (similar to interest from the Bank usually paid Net of tax))

 

Hope this puts a few things straight, and yes dividends are paid after corp tax.

 

Cheers

 

NB

[chady]

How dose that work then?

 

That surly can't be straight forward.

 

 

I went this way many years ago for the same reasons.

 

Unfortunately, today, directors of a limited company can be sued personally so you don't have that protection anymore.

[sitsinhedges]

I went this way many years ago for the same reasons.

 

Unfortunately, today, directors of a limited company can be sued personally so you don't have that protection anymore.

 

If that's the case it isn't really a ltd company by definition, is it?

[welsh1]

I went this way many years ago for the same reasons.

 

Unfortunately, today, directors of a limited company can be sued personally so you don't have that protection anymore.

 

You could only sue the directors by name if they had acted as personal guarantors for the company,this is becoming more common as people dealing with other ltd companies are writing it into contracts to protect themselves.

But if your company fails and it is down to your failure as a director to administrate it properly you could be held liable for debts incurred.

[Greymaster]

Tax benefit to be Ltd over 30k only. Basically someone could pay themselves 6k a year and as a low income earner the gvnt will pay your NI for you. You then get a dividend as the only shareholder, the company pays 10% tax on the dividend, you pay nothing. Company pays 22% corporation tax on any profit after you salary deduction. Net tax save.

 

Better still someone could start as a sole trader, build a company up for a couple of years then switch to ltd, selling the goodwill to the company. The company has no funds for this and owes you the money, if it starts to make a profit it could then repay this loan and avoid tax for a few years. But that may get inspected closely and is probably immoral.

 

The 10% dividend distribution tax was abolished. The dividend paid is deemed to have a 10% tax paid via Corporation Tax (currently 21% on taxable profits), and the recipient gets a tax credit = to the 10% deemed tax. And if a basic tax rate payer, no further tax to pay on the dividend.

 

Eg:

 

Company Turnover 65,000

Expenses (35,000)

------------------------

Net Profit 30,000

Corp Tax (6,300) [30,000 @ 21%]

-----------------------

Profit after Tax 23,700

Less Dividend (23,700) [imputed Tax credit 2,370)

--------------------------------

Profit After Tax ZERO

-------------------------------

 

Personal Income 26,070 (via dividend inc tax credit)

Personal Allowance (8,105)

------------------------------------

Taxable Income 17,965

-----------------------------------

 

Basic Rate Tax (3,593) [i.e. 20% x 17,965]

Less Tax Credit 2,370

--------------------------------

Tax to Pay 1,223

 

Total Tax Burden [6,300 + 1,223] = 7,523

 

The beauty of being limited is that you have not paid any NI on your income.

 

If you paid yourself the equivalent of the Personal Allowance of 8,105 via the Company you will reduce the profits assessable to Corp Tax by the same amount (but reduce the dividend available as well and tax credit), but overall be about £850 better off due to the difference between Corp tax rate and Income Tax rate.

 

As a sole trader you would have to pay Class 2 and Class 4 NI Contributions

 

Class 2 = £2.65 per week = 52 x 2.65 = £137.80

Class 4 = 9% on annual taxable profits between £7,605 and the limit of £42,475 maximum then £3,138.30.

 

This is a simplified example and only illustrative of general principles. Seek the advice of a professional accountant.

Edited February 14, 2013 by Greymaster

[Night blaster]

 

 

The 10% dividend distribution tax was abolished. The dividend paid is deemed to have a 10% tax paid via Corporation Tax (currently 21% on taxable profits), and the recipient gets a tax credit = to the 10% deemed tax. And if a basic tax rate payer, no further tax to pay on the dividend.

 

Eg:

 

Company Turnover 65,000

Expenses (35,000)

------------------------

Net Profit 30,000

Corp Tax (6,300) [30,000 @ 21%]

-----------------------

Profit after Tax 23,700

Less Dividend (23,700) [imputed Tax credit 2,370)

--------------------------------

Profit After Tax ZERO

-------------------------------

 

Personal Income 26,070 (via dividend inc tax credit)

Personal Allowance (8,105)

------------------------------------

Taxable Income 17,965

-----------------------------------

 

Basic Rate Tax (3,593) [i.e. 20% x 17,965]

Less Tax Credit 2,370

--------------------------------

Tax to Pay 1,223

 

Total Tax Burden [6,300 + 1,223] = 7,523

 

The beauty of being limited is that you have not paid any NI on your income.

 

If you paid yourself the equivalent of the Personal Allowance of 8,105 via the Company you will reduce the profits assessable to Corp Tax by the same amount (but reduce the dividend available as well and tax credit), but overall be about £850 better off due to the difference between Corp tax rate and Income Tax rate.

 

As a sole trader you would have to pay Class 2 and Class 4 NI Contributions

 

Class 2 = £2.65 per week = 52 x 2.65 = £137.80

Class 4 = 9% on annual taxable profits between £7,605 and the limit of £42,475 maximum then £3,138.30.

 

This is a simplified example and only illustrative of general principles. Seek the advice of a professional accountant.

 

Some of that is slightly incorrect,

 

Dividends are taxed at the following rates

I

10% if you fall in the 20% tax bracket or

32.5% if you fall in the 40% bracket

Or 42.5% if you are lucky enough to earn over 150k

 

Therefore all dividends have a 10% tax credit attached when paid, you only pay additional tax if you are a higher rate tax payer

 

Note if you do not utilise your personal allowance elsewhere you will not get any tax back off dividends so it makes since to pay yourself a wage of at least your personal allowance. It is an expense to does reduce profits which lowers corp tax

 

Corp Tax rate is now 20% for SME's has been since 1-4-2011.

 

In the above example you would be better pay your salary of £8105 to reduce company profits £21895x 20%= £4379total tax payable

 

Income

Salary 8105

Net dividend 17516

Total cash in pocket 25621 out of 30k profit

 

 

 

 

 

[chady]

I think I now know why I need an accountant!!!!!!!!!!!

[chady]

Do you have to have a business acc or can you just have a normal bank acc??

[al4x]

Having one business account makes things a lot simpler

[Greymaster]

Some of that is slightly incorrect,

 

Dividends are taxed at the following rates

I

10% if you fall in the 20% tax bracket or

32.5% if you fall in the 40% bracket

Or 42.5% if you are lucky enough to earn over 150k

 

Therefore all dividends have a 10% tax credit attached when paid, you only pay additional tax if you are a higher rate tax payer

 

Note if you do not utilise your personal allowance elsewhere you will not get any tax back off dividends so it makes since to pay yourself a wage of at least your personal allowance. It is an expense to does reduce profits which lowers corp tax

 

Corp Tax rate is now 20% for SME's has been since 1-4-2011.

 

In the above example you would be better pay your salary of £8105 to reduce company profits £21895x 20%= £4379total tax payable

 

Income

Salary 8105

Net dividend 17516

Total cash in pocket 25621 out of 30k profit

 

That's why I stated "This is a simplified example and only illustrative of general principles. Seek the advice of a professional accountant."

[kent]

I went this way many years ago for the same reasons.

 

Unfortunately, today, directors of a limited company can be sued personally so you don't have that protection anymore.

They always have been able to be sued but only for mis managing that company- trading insolvent, over drawn loan account, corporate manslaughter. What the LTD realy means is you can walk away without loosing personal assets IF you don't break the law

[chady]

That makes sense and seams fair

 

 

They always have been able to be sued but only for mis managing that company- trading insolvent, over drawn loan account, corporate manslaughter. What the LTD realy means is you can walk away without loosing personal assets IF you don't break the law

[JonathanL]

I went this way many years ago for the same reasons.

 

Unfortunately, today, directors of a limited company can be sued personally so you don't have that protection anymore.

 

Not for the debts of the company they can't. I'm sure they could if they have behaved criminally but not in he ordinary course of things.

 

J.

 

If that's the case it isn't really a ltd company by definition, is it?

 

A limited company is a device to protect the shareholders.

 

J.

[JonathanL]

They always have been able to be sued but only for mis managing that company- trading insolvent, over drawn loan account, corporate manslaughter. What the LTD realy means is you can walk away without loosing personal assets IF you don't break the law

 

And you can only be sued by members of the company as no one else has a cause of action, I think. So, you couldn't be sued by, for instance, another company which your company owed money to unless, perhaps, if you were using the company as a vehicle for fraud. At least think so.

 

J.

 

J.

[guest1957]

 

 

And you can only be sued by members of the company as no one else has a cause of action, I think. So, you couldn't be sued by, for instance, another company which your company owed money to unless, perhaps, if you were using the company as a vehicle for fraud. At least think so.

 

J.

 

J.

 

Piercing the corporate veil is a hugely complex area of law and can't really be covered here in any meaningful detail.

 

Suffice to say it isn't really going to be an issue for most ltd companies.

[steve sparky]

OK doki