Worth creating a limited company?

[jd77]

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Searched, and searched the forum but not found any thing on this point.

I am a regular 9-5 monkey with PAYE. I am registered self-employed for my affiliate 'hobby'.

This extra money will take me in to the higher rate tax band and I was wondering if anybody has made the jump and moved from self-employed to limited company.

As a limited company the first 10,000 business profit is tax free and I could obviously pay myself a salary as a director. There are then more attractive rates of taxation compared to a personal allowance.

Anybody done this - worth the initial outlay. What are the tax rules on paying yourself a yearly dividend etc.

[angelabx]

See the other thread currently discussing tax under 'millionaire".

The way I see it is the only real advantages of a limited company are:

1. Removal of personal liability
2. The ability to retain profits in the company and then only pay yourself when one-day you're earning at the basic rate. ie. Treat it as a pension fund.

[Top banana]

I suggest you speak to an accountant. But the way i understand it is that you pay less tax while the money is in the company, but when you take the money out of the company it is subject to the normal income tax, so there isn't any tax benefit, but i could be wrong.

[Brendon]

>> when you take the money out of the company it is subject to the normal income tax

That's why you take a great chunk of it out as dividends, which is then subject to Capital Gains Tax. You get a second allowance for CGT (about £7k, I think) which is untaxed, and doesn't impact your income tax status, I think.

You could also write off some expenses against the company accounts if you were travelling for business related to your affiliate activities, say attending a G2G

You really, really need to talk to an accountant for a genuinely competent answer, though

[Barry]

I would recommend it for sure but ask your accountant about it.
You wouldn't have to draw any salary as a director but you could still use the business to pay for your affiliate outgoings. Also depending on what your affiliate websites are also earning you can sell them to your own company as well as far as I am aware.

[ian]

The basic answer is to consult an accountant as they will have systems to work it all out.

My basic understanding of it is.....

• Pay yourself a salary up to your basic allowance (0% income tax)
• Company pays HMCE 19% corp tax - crying and complaining all the way
• Issue dividends as you avoid National Insurance payments
• You pay income tax on dividends, but as dividends come with a 10% tax credit you effectively pay 0% tax on income up to £32k (ish) and 22% for income over that.

Lots more info on google. Do a search for 'salary vs dividend'


If you don't need to spend more that £37k a year, a ltd company acts as shelter from paying higher income tax rates. You can build up the funds and release when you stop 'working' or you income reduces and you need to top it up. Make sure any company funds are invested in a bank with a decent interest rate 5.2% from A&L

[essdeekay]

The main benefit is the ability to print shiny little business cards with your name and "Managing Director" on - loads of kudos down the pub!

For me though it is the ability to limit your liability and hide behind the veil of incorporation - never sign personal guarantees, EVER!!!!!

Si

[angelabx]

>>

That's why you take a great chunk of it out as dividends, which is then subject to Capital Gains Tax. You get a second allowance for CGT (about £7k, I think) which is untaxed, and doesn't impact your income tax status, I think.

You could also write off some expenses against the company accounts if you were travelling for business related to your affiliate activities, say attending a G2G

You really, really need to talk to an accountant for a genuinely competent answer, though

Nope. Dividends suffer income tax not CGT - I'm 100% sure of that.

You can write expenses off against profits whether you're a sole trader or a limited compnay - no difference.

[hrbs]

Hi,

Some basics re limited companies, forgive me if you know these already. Excuse the long post but, as an accountant specialising in small businesses, I come across many misconceptions about limited companies and their accounting/legal/tax obligations.
[edit - this becoming more of a FAQ]

Ltd companies are separate legal entities to the owners (shareholders)/directors and need separate bank accounts etc.

Directors are employees of the company and therefore wages are taxed under PAYE and companies pay NIC @ 12.8% on the gross wage.

If you have another job/pension you do not get an additional personal allowance ie you will pay tax on all your wage and will therefore need to operate a Payroll scheme (deduct tax/NIC and pay to HMRC, file end of year returns, P14/60, P35, P11d etc).

Dividends are paid to shareholders out of after tax income (a common problem if an accountant's advice has not been taken, is that in the early days excess dividends are withdrawn i.e. the companies tax liability is forgotten about).

There is no longer a 0% CT band (http://www.hmrc.gov.uk/rates/corp.htm ). All the profits will be taxed at 19% (upto 300k) . The 0% rate in its latter stage was a red herring as if the company paid dividends to its shareholders, the non corporate distribution (NCD) rate came into force (ie 19%). From 2006/07 the NCD is not applicable.

Eg profits before tax = 100k, tax @ 19% = 19k, maximum dividend available = £81k - obviously subject to the company's cashflow.

Wages and dividends have to be declared on your personal tax return.

Expenses - in general the same can be deducted from Ltd co. profits as from sole trader profits. However, bear in mind that you will be an employee of the company and therefore the rules for reclaiming buiness expenses are different (wholly and exclusively is the rule for sole trade/partnership, but wholly, exclusively and ** necessarily ** applies to employee expenses - a major difference, tax lawyers have made fortunes on this one word!) .
HMRC are gradually understanding the concept of "home office", but the expenses claimable by an employee are not as great as the expenses justifiable by the sole trader working from home (the necessarily condition again).

In general make sure that all bills (ADSL, mobile, etc) are in the company's name and not the director/employee. If they are in the name of the director/employee the company is effectively paying the employee's bill and this would be a taxable benefit and/or only a proportion _necessarily_ incurred on the company's business would be allowable as an expense.

As already said, dividend payments from the company can be timed so that you maximise your basic rate band as there would be no further tax payable. However if you are a higher rate tax payer you will effectively pay tax on 25% of the net dividend which exceeds your basic rate allowance. Dividends have to be declared at director's/shareholders meetings and dividend vouchers prepared as evidence for HMRC (and as record of your tax credit). Dividends can be paid monthly/quarterly/yearly - depending upon the company's profitability and cashflow and your personal tax situation.

As a general suggestion, it is good practice to review your personal tax liability/dividends potentially available in March to maximise the use of your basic rate tax band, and declare a suitable dividend by 31 march/5 April. The cash can be left on loan in the company and paid out when the company's cashflow allows.

Ltd companies offer limited liability but bear in mind in the early days of a business you may have to give guarantees to the bank/HP companies and suppliers if you have no trading history with them. Occasionally you may have to give a VAT bond. These issues may not be relevant for affiliate marketeers who do not need to borrow funds/have overdraft etc but may need to be considered for online traders.

Limited companies are legally required to maintain adequate accounting records - no fag packets allowed! ie you must be able to prepare a full balance sheet and profit and loss account from the accounting records. Under company law directors are stewards of the company for the shareholders (even though they may be one and the same). Therefore they must be able to prepare accounts reporting the company's financial situation at any stage (and at the relevant dates for Companies House/HMRC reporting ie year end).

The companies accounts have to be filed at Companies House and are public record (can be downloaded in minutes for £1), although accounts for "small" companies do not need to be audited (small is defined on Companies House website, but the vast majority of AM Ltd Co's would fit into this classification).

The company also has to prepare a corporation tax computation and send a full set of accounts to HMRC (an abbreviated set can be filed at Companies House). The corporation tax is payable 9 months after its year end. ie the corporation tax for a 31 January year end is payable on or before the following 1 November.

The director's address and date of birth details are public record as the company has to complete an annual return and submit details of directors to Companies House - again these forms can be downloaded by jo(e) public for £1. Initially the details are submitted when the company is formed.
Currently a company must have at least one director and a company secretary (due to be changed later this year as the new Companies Act is introduced). It is common to have a spouse/partner or your accountant to act as company secretary.

Directors cannot draw money out of the business as and when they wish unless they have a directors loan account in credit (ie money loaned to the company or dividends awarded but the cash not paid) - otherwise there may be tax/NIC consequences.

Many people feel that the lack of privacy, flexibility and additional administration involved outweighs the tax/NIC savings.

Moving from sole trader to limited company is quite straight forward and I have already done this for several members of this forum (including dividend documentation, companies house/HMRC/VAT liaison, payroll schemes etc). Companies can be formed on line from approx £35 (inc VAT) .

It is possible to deal with all the accounting, payroll, Companies House, HMRC, dividend administration yourself but in my experience, it is quite often too much for the sole director to deal with in addition to the day job and developing their business. Bear in mind that tax/VAT/payroll rules change every year!


If anyone need any advice, or wants to bounce ideas, please feel free to PM or share with the forum.

Regards

Keith
HRBS
Small Business Specialists

[Flightmapping]

I don't think we're the only ones here who trade through a separate Ltd company (in our case, Archetects Ltd), rather than as Flightmapping, or Flightmapping Ltd.

This is something we're currently looking at, and which might be worth considering for the long term:

What if you want to sell your website? My understanding is that it is more tax efficient to sell the whole company (capital gains tax on just 25% of the value), rather than just selling the domain (capital gains tax on the lot).

What if someone tries to sue you / your "website"? Anyone with extensive content needs to consider this, especially if you have a big forum or an active blog. We know how litigious certain travel companies can be, so we have to be careful.

What if you want to give other partners in the business a shareholding?

What if you want to start up other websites, using a similar affiliate business model?

As always, the answer will have to lie in going back and getting professional advice, but I would just add that rather than asking about creating a limited company, you might also want to consider whether or not it is worth having a separate company for each site you plan to run.

[jd77]

Many thanks to all the excellent responses. It seems there is a great deal of options on this matter. Really informative responses here.

I will try and clarify that share dividend thing.

As I said I am in full time employment so couldn't pay myself a wage up to the personal allowance 0% tax limit. But I could pay myself up to the 40% limit and pay myself either share dividends for some of the other (or keep it invested in the 'company').

Thanks again.

[jd77]

Just found this
http://www.direct.gov.uk/en/MoneyTax...nts/DG_4016453

I have only had a brief scan but..

if you ensure you keep yourself as a basic rate taxpayer you pay 10% on dividends

otherwise higher rate taxpayers pay 32.5%.

This is still better than the 40% on income either way.

[hrbs]

Just found this
http://www.direct.gov.uk/en/MoneyTax...nts/DG_4016453

I have only had a brief scan but..

if you ensure you keep yourself as a basic rate taxpayer you pay 10% on dividends

otherwise higher rate taxpayers pay 32.5%.

This is still better than the 40% on income either way.

If you are a basic rate tax payer your tax laibility is covered by the tax credit ie no further tax to pay.

If you are a higher rate tax payer, the tax is 32.5% of gross dividend minus the 10% tax credit ie 22.5% of the gross dividend which is 25% of the net dividend (easier to remember).

NIC:

Another issue to consider is class 4 NIC which for a sole trader/partner takes another slice of your self-employed income. So if you have a day job paying, say 25k, self employed profits of 20k you will be paying both 40% income tax on some of your income *and* 8% class 4 NIC on your self employed profit. So you have to consider your personal situation, now and in the future (if you were to give up the day job) when weighing up the potential self employment-v-limited company tax benefit.

However, you can apply for deferment from NIC payments if you are likely to be paying max NIC through your day job.

NIC rates are here: http://www.hmrc.gov.uk/rates/nic.htm and deferment here: http://www.hmrc.gov.uk/nic/deferment.htm and FAQ here: http://www.hmrc.gov.uk/faqs/nicqc1.htm

Keith
HRBS
Small Business Specialists

[Flightmapping]

Don't forget the pros and cons of VAT registration too.

One other thing - iirc, the student loans company considers rental income and dividends as "unearned income", which presumably means that under the belief system of the commy who wrote their forms, you haven't worked for the cash. Therefore, I'm not so sure if it needs to be declared. If you have a student loan to pay, but can keep your "fixed" (ie salary + self employed income, but not dividends) income below the repayment threshold, then can you keep suspending these payments?

[hrbs]

Student loans:

As per:

http://www.direct.gov.uk/en/Educatio...98/DG_10034867

investments (ie interest/dividends) are treated as unearned income and therefore count as income in calculating your SL payment

eg
"Repayment example two: Robert

Robert is employed but also has income from other sources (for example, renting property, investments, personal pension).

He earns £14,000 per year, and gets a further £2,500 in unearned income - which is £1,500 over the repayments threshold.

* Robert's student loan repayments will be nine per cent of £1,500: £135 per year"

Per : http://www.direct.gov.uk/en/Educatio...98/DG_10034871

"If you are subject to both Pay As You Earn (PAYE) and Self Assessment

If you are self employed but also work as an employee, are subject to tax at a higher rate or have unearned income from stocks, shares and savings or other sources, you will be required to calculate any student loan repayments due through Self Assessment in addition to any repayments which are deducted through PAYE. "



Keith
HRBS
Small Business Specialists