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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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