Tax Return

 UK Tax System

Limited Company

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The establishment of a limited company is the route that many business people (although IT consultants, in particular, often find it difficult to persuade the Inland Revenue that they are consultants rather than employees) are forced to take.
The advantages are that the liability of the shareholder or shareholders is limited to the capital subscribed - so your personal assets are usually safe from any actions by creditors or Government agencies. The second advantage is that with careful planning you will still pay less tax than an employee for a given level of income.
Thirdly small companies are taxed at only 20% (with a rate for small companies, just starting out, of only 10%). So if you do not need to take all of your income straight out of the company, you can leave it to accumulate within a low tax environment. This, coupled with recent changes in capital gains tax, means that small companies can become an extremely tax efficient way of saving.
For a business person the main disadvantages of trading through a company are the amount of paperwork and an increase in tax planning complexity if you, rather than the Inland Revenue and the Contributions Agency, are to receive the benefit from your work.
When you trade through a limited company you are an employee of the company. Your client pays your company which, in turn, pays you.
This leads to the increase in paperwork. If you trade through a company you will need to file a set of accounts for the company each year and file a corporation tax return. You will probably want to pay yourself a salary! - which means that you will need to calculate and deduct employer's and employee's NICs and to calculate and deduct the appropriate amount of tax due to the Inland Revenue under PAYE (Pay As You Earn). Finally you will probably need help with your own tax return.
The good news is that you can usually sub-contract all of this work. With the exception of your own personal tax return, the cost of sub contracting this work is a business expense and is allowable against your income!
You will also want to ensure that you maximise the amount of after tax income that you receive.
The most obvious way of taking money from the company, via salary, is actually the least tax efficient. When your company pays a salary to you it must first pay employer’s NICs at 12.2% on earnings over £87 a week. Then you have to pay employee’s NICs at a further 10% on earnings between £72 and £575 a week and finally you have to deduct income tax under the PAYE scheme. Many business people are well paid and so will pay tax at 40% on earnings over £29,400 (once adjusted for personal allowances).
You can pay a salary to your spouse or partner to reduce your tax bill, however careful planning is required to ensure that the amount paid by your spouse in employee’s NICs is not so high that it offsets the savings in income tax.
However for many business people there is a better way of extracting money from the Company, via dividends. No NICs are payable on dividends (which means you could be 20% up before you start!). The abolition of Advance Corporation Tax means there is a cashflow advantage as well in that income tax on dividends is not deducted at source via PAYE, but is paid to the Inland Revenue in three lump sum payments. Meanwhile you earn investment income on the money.
The third way of taking money from company is via benefits in kind, whether the traditional kind such as cars, medical insurance and mobile phones through to the more exotic - such as boats and second homes. While the Inland Revenue does tax these benefits it is still often cheaper to have them bought by the company and provided for your use rather than receiving the income.




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