I am looking at tax rates and I think that it is better to start as self employed as to benefit form Personal Allowance and than change the status to limited company if the income exceeds the basic rate limit (fa 2012 £34370) as this becomes taxable at 40 % and for the ltd is still 20 % small profits rate up to 300 k trading profit.
Am I right ?
Is there anything else to consider in choosing between self employed or ltd ?
I am trying to have all the details as I think they are more than useful when speaking directly to the client.
Many thanks,
Adrian
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This is just my personal opinion. Advice should be sought from a suitably qualified Accountant.
P.S. I only ride a motorbike because I want to dry my clothes faster
for advising clients on corporate structures basing information that you convey to clients on the short answers that you get on forums (even my half page essays) is like trying to advise the head of the post office because you once bought a stamp.
There is a lot to consider in relation to legal form and a lot of case law and tax legislation that sits behind it.
On the whole tax concept your assumptions are based around how much money you leave in the business. Once you take it out it doesn't matter whether your are an employee or self employed you will pay the same tax.
NI is where things go haywire for incorporated entities as you pay both employee's and employers NI contributions.
IR35 legislation also throws a spanner in the works on the whole tax saving arguement of being limited.
Remember that with a limited company you may own the company but it is a totally seperate legal entity and you have a duty over it the same as a parent would over a child.
The companies money belongs to the company. It does not belong to the owner as such although for single director companies there is in reality very little difference in practice.
That said, treat a company as a piggy bank and HMRC will can lift the veil.
With self employment the money belongs to the business owner.
Got to go, chat later,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I know I still need a lot to learn. Actually the money are taxed twice if they are coming from a company in the pocket of the director ? 1st the 20 % small rate 2nd the personal tax
Many thanks
Adrian
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This is just my personal opinion. Advice should be sought from a suitably qualified Accountant.
P.S. I only ride a motorbike because I want to dry my clothes faster
I know I still need a lot to learn. Actually the money are taxed twice if they are coming from a company in the pocket of the director ? 1st the 20 % small rate 2nd the personal tax
Many thanks
Adrian
Not really - as the wages taken out will reduce the amount of profit taxable. Different from a sole trader in that it doesn't matter how much they take out they are still taxed on the profit and not the drawings.
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Never buy black socks from a normal shop. They shaft you every time.
I think that I can see what Adrians getting confused with.
Company reaches the end of the period, it's taken all the salary and paid all the expenses that is going to be taken and pay tax on the remainder.
Next year company earnes no money takes salary and pays personal tax on it.
The confusion that Adrians having is that he's missing that in the second year the salary reduces profit into a loss which is carried forwards to relieve future profits against which of course no tax will be paid.
See what happens Adrian. You are only really ever paying the tax once, not twice. The planning comes into ensuring that you pay at the best rate and also getting your timing right to try and avoid / reduce interim payments.
Note that interim payments as well are no over payments but rather timing differences and the issue is with cashflow, not tax as such.
I'm actually better accustomed to that discussion standing in front of a white board with a client sitting in the room looking like a rabbit caught in the headlights of an oncoming car.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
If you are looking at it purely from the point of view of tax efficiency, you need to remember the national insurance.
Sole traders pay tax and national insurance on income above the tax free amount. Companies pay tax only. Therefore the tax efficient option is to be a company paying the director a salary just below the national insurance threshold (currently £641 per month) with the rest taken as dividends. You can also set up a childcare voucher scheme for further tax advantages if appropriate.
There are lots of other considerations though, such as limited lability, extra admin and accountancy fees, image etc.
Thank you Peasie, Shaun and Ruth. I am starting to feel like the rabbit that Shaun was talking about.
If it is possible let`s start with a case study for someone who earns 30,000
For Soletrader:
Class 2 Nic: 2.65 X 52 weeks = = 137.80
Class 4 Nic 30,000 - 7605 lower limit = 22,395 22,395 X 9 % = = 2015.55
Tax 30,000 - 8105 personal all= 21895 21,895 X 20 % = = 4379
Total to pay: 137.80 + 2015.55 + 4379 = 6532.35
Take home: 30,000 - 6532.35 = 23467.65
Please if someone could help me with the calculation in case of a limited company. As I do not understand how much £ the owner of the ltd company will take home.
Many thanks,
Adrian
__________________
This is just my personal opinion. Advice should be sought from a suitably qualified Accountant.
P.S. I only ride a motorbike because I want to dry my clothes faster
to add to Ruth's point above though paying little of no NI will affect the directors state pension so there's another factor to throw in the melting pot when considering the option of dividends as opposed to salary.
If you advise a client to take the dividend route and their pension suffers on your advice then you can be sued many years down the line by the client for their loss incurred as it meets all of the criteria for a negligence claim... Possibly long after one's PII has expired.
See what we mean Adrian about how dangerous this is.
p.s. amended because my paragraphs disappeared.
-- Edited by Shamus on Wednesday 3rd of July 2013 10:51:43 PM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
so takehome from company income of £30k would be 30000 - 3106.67 - 2314.60 - 3757.67 = £30k - 9178.94 = £20,821.06
And that comparrison in a nutshell is why directors take dividends.... Except under IR35 legislation taking dividends would be restricted to a dividend (from the example) of £1500 so even then self employment would be a better option (in this instance).
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Dividends is often a decider, but as Shaun said at the beginning that is not the only decider. Worth considering limiting your liabilities and potential insurance claims, depending on the nature of your business - there are certain protections from being Limited (as long as not breaking the law or acting plain foolishly!), but then there are certain responsibilities too. If you go to a good and respected Accountant they will usually give you some initial advice for free/small fee as its worth getting your structure right as it often saves money in the long run.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
it was in relation to the belief of some out there to advise clients on a pay rate that does not even hit the LEL without thinking about the repurcussions of such. I admit it, I phrased it badly and shouldn't have mentioned the actual payment of NI. My bad.
I also mentioned IR35 earlier to emphasise that what was right for one business was not a blanket answer for all businesses and to sort of emphasise to the poster that what was a simple question does not have a one size fits all simple answer.
Just did your calculation and cannot see why I'm 80p out on the total taxes payable (I get it to 4461.60).
Probably just too late in the day and I've hit the wrong button on my calculator somewhere. I'm calling it a night and I'll do my sums again with a fresh head in the morning.
Adrian,
in case you get confused by the numbers above Mark is using 2013/14 which is what I nearly did early but then changed it and added the line about using the same tax year as yourself. It makes no difference which tax year is used though Marks message clearly shows the effect of self employment vs dividends.
kind regards,
Shaun.
p.s. only edited because the editor lost my paragraphs (again. thats twice today)
-- Edited by Shamus on Thursday 4th of July 2013 01:07:10 AM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
the issue is that Adrians asking here in order to advise others on their corporate structures where those like ourselves know that there are a lot of things to factor into the advice dependant upon the client.
For open ended questions such as this we cannot put into forum posts our experience and several books on accountancy and tax so cannot via this medium put someone in a position to be able to give that level of advice.
In Adrians case I fear that his enthusiasm to get to where he wants to be may overtake him in that he is attempting to start too high up the tree. One mistake and not only does he come down with a bump but will also be hit by every branch that he missed en route.
I can't blame him as you look at this site and you can see again and again cases of people offering services that are beyond their capabilities but of course that is what the client expects of us as clients see no difference between bookkeepers and accountants except the price.
And of course to a certain extent not offering a service that the client expects will lose the client to someone else who is willing to risk their professional qualification (or just doesn't have one in the first place).
I know that to some extent we all do things beyond our comfort zones but I think with experience you learn to take on small additional chunks alongside and complimentary to work that you are comfortable with rather than offering whole services that are beyond our experience level.
As with all members of this site I want to see Adrian succeed but at the same time I want to curb his enthusiasm to offer services such as this until he has either experience or a serious accountancy qualification (or preferably both).
Hope that came accross in the constructive way that it was intended,
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Well put Shaun, especially as I hadnt read the end of Adrian's second line properly and sorry for that. I have done both in my time - be self employed and a Director plus worked in Corporate Finance looking after both, so know a lot of pros and cons for both, but certainly would find it hard to advise on this forum, not only due to Accountancy and Tax matters but Legal ones too.
So Adrian - I hope you dont mind Shaun curbing your enthusiasm a bit at this time.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
The calculation for a limited company in the most tax efficient way would be:
Director's salary £7488 (no tax or national insurance paid)
Thus company profit is £30,000 less £7488 = £22,512
Corporation tax due £22,512 x 20% = £4,502
Dividends £18,010
Thus total paid to HMRC is just £4502 so less is paid than as self employed.
As has been said, there are lots of other issues to take into account and IR35 may or may not apply in individual circumstances. I also agree that it's very important to know what you do and don't have the experience and knowledge levels to actually support clients with but I think it's useful to see the full calculations for our own understanding.
Thank you all for the advice.
I finally realise how small I am. Yes there is more than I thought it could be and I really need to upgrade my knowledge.
I reckon that this matter is beyond my power for the moment.
I am discovering every day new things including amazing software, I would like to ask Mark it the calculations above are done by TaxCalc or just manually ?
Many thanks,
Adrian
__________________
This is just my personal opinion. Advice should be sought from a suitably qualified Accountant.
P.S. I only ride a motorbike because I want to dry my clothes faster
Thank you all for the advice. I finally realise how small I am. Yes there is more than I thought it could be and I really need to upgrade my knowledge.
You and me both matey.
I've been playing this game now since 1990 but more on the management accountancy side of the fence until 2009 (although I've been taking financial accountancy qualifications since 2003).
Still not a day goes by that I don't learn something new.
Marks been working at a high level in financial accountancy for 16 years and is far, far more experienced and knowledgable than myself on that side of the fence (and could probably give me more than a run for my money on my side).
Thats the good thing about this business, the more that you know the more that you realise that you don't.
And on that note I really have got to go to bed.
talk tomorrow,
Shaun
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks to Shaun, I do realise that an accountancy career is for life not just for Christmas.
This things being said I would like to ask the annoying questions as for FY 2012, after what amount of net profit, a sole trader would consider to switch to ltd in order to save tax.
I would do the calculation my self also, but I fell on the safe side if I get some backup.
Many, many thanks,
Adrian
-- Edited by Adrian99 on Thursday 4th of July 2013 03:58:16 PM
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This is just my personal opinion. Advice should be sought from a suitably qualified Accountant.
P.S. I only ride a motorbike because I want to dry my clothes faster
This is a helpful discussion when trying to explain to clients that they need an accountant. Sometimes I ask, what did your accountant say about... and get a blank look. Clients will ask me what they should ask their accountants, then ask me to explain the answer, so they can understand it. So thank you for asking this question and the answers - I never intend to advice on this but I do need to know how complex it is and be able to explain at least some of the complexities to my clients.
