Deep Singh

Firstly can I form a limited company to cover my self employed/private practice income?

Will it have tax advantages? I understand that the money has to stay in the company, any dividends or salaries are taxed at 40%. Can I have for example my mum ( who is lower bracket tax as compared to me) as a shareholder and give her all the money taking advantage of her lower tax rating?

Since I will be a VERY small company, and pay an accountant about £300/year to do my return already, what will the additional cost be?

Many thanks

KiwiGTI

In a nutshell yes. Dividends are essentially tax free for the first £30,000, and you could pay multiple shareholders that.

You will have to pay corporation tax on any profits though.

You can do company returns yourself and just get an accountant to certify the year end accounts.

andy97

iTrader: (1)

Only pay tax on profit over £10K

Deep Singh

Kiwi, are you sure dividends are tax free for the first £30000 as I heard the law has changed recently.

Deep

KiwiGTI

Tax on UK dividends : Directgov - Money, tax and benefits

salsa-king

Deep.
have a word with your account first, see what his views are.
He would advise you the best.

to do Ltd company accounts he would have to be able to filed accounts to companies house.

Brit_in_Japan

You will be lucky to only pay £300/year for an accountant !

Many accountancy firms have Ltd Co's "on the shelf" and will give them to you if you as part of an initial 12 months of accountancy service. You can do it yourself of course, just check the Companies House website for information and forms. Your accountant can advise on how to structure salaries/dividends to take maximum benefit of tax allowances. Also certain business expenditures will be tax deductable, i.e. paid before any corporation tax is paid. That could include capital purchases such as a PC, printers etc, or expenses such as a mileage allowance. You can even claim for a % of heating/lighting costs if you use a room in your home as an office, though beware CGT if you then sell your house. Depending on your turnover it might be worthwhile registering for VAT. The Flat Rate Scheme takes some of the administration away and can leave you with extra in your bank account.

I recommend you do some research here:-
Professional Contractors Group - Home

salsa-king

yep i'm paying about £600 a year for my NEOQUIP (Europe) LTD accounts to get done and filed... and its only a small internet business!!

Longjing

There's definitely expense and botheration involved, and you can't ignore the reporting requirements - you'll get fined endlessly. The legal formalities of formation are simple... an accountant is the place to start rather than a lawyer.

Longjing

The tax credit on uk divs means that they are effectively tax free in the hands of lower rate payers with no other income. I think.

There are definite possibilities if you are happy to do that and have lower rate payers you trust to own your business.

hail-hail

I have my own Ltd company basically its just for me, an IT consultant.
Benefits I have noticed are........

VAT, claim VAT back on anything you can justify as a company expense.....PC, Projector (for the games room in the garage), SLR camera, meals out, postage, travel (recent 'business' trip to Amsterdam), software, bog roll............the list goes on.
Also anything money you spend directly from company funds you haven't paid any tax on, so for example, bought the wife a Digital SLR Camera for christmas, cost £500.
I saved 40% as I didn't pay any tax on the income and then claim another 17.5 % back off the VAT man less then half price or there abouts.
My 'office' will soon be needing another large LCD TV as you can probably imagine...........

Get some employees, my wife doesn't work, but I can pay her 32kish or whatever it is before hitting the 40% mark. So between us we can earn 60k odd with hitting the high tax bracket.

Dividends are slightly better that PAYE but I don't really know the ins and outs. I do all my own accounts on Sage, then before the end of the tax year I send my Sage back up to my accountant and they run through it and change PAYE / dividends etc to make it the most tax efficient for me. I will probably pay my accountant < £1000 per year, but save much more than that.......

In summary, do it.

hail-hail

Oh and search on the internet to set up your Ltd company, my accountant told they would charge £150, but recommended I do it myself, <£50 iirc.

Matteeboy

At first the extra works seems daunting but you soon get used to it.
Me and wife have two Limited Companies (one's sort of dormant but still needs paperwork filing) so we have to be quite disciplined but sort some systems out and it's pretty straighforward.

Not a bad idea to go on a basic book keeping/accounts course (I did) - The accountants are still needed but I like to know I'm not being ripped off and could do the job myself if needed.

Deep Singh

Thanks guys, I will talk to my accountant but would like to understand things a little better myself. A few questiions:

1) Kiwi's link states that dividends are paid out of profits on which the company has already paid tax. Does this mean that the company pays tax prior tp paying the dividends and at what rate?

2) What share can you give the shareholders without pissing off the taxman? For example my private practice can total say, 15 hours a week. Can I really give someone a 50% share for just doing admin/paperwork/phone work when really that is a smaller part of the total?

3) Have I understood correctly that a lower bracket shareholder will pay 0% tax and a higher rate shareholder will pay 22.5%

Many thanks

The Snug Rhino

be carefull - HMRC are not idiots and if you give someone £30k a year when all they do is cook your tea you may run into problems - same as offsetting expenses that are not genuine. If you have a tax investigation it WILL come up.

bohnjegley

Look on the bright side, if you company is VAT registered, you too can spend three nights looking at vat receipts for fuel, IT, clothing, material, tools etc.

Just like I have been doing.

Set my company up last year and it pays dividends to me, which are tax free, the 30000 pound bracket then the rest you need to pay in a salary, so you income is around where you need it to be.

My accountant set the company up, registered for VAT in two days, Cost £384-00p.

Now all I need to do is the work

Deep Singh

Thanks. Can someone help with points 1) and 3) in my post above?

FATBOY_STi

PM Me, I will set you up a Ltd Company for less than the accountant above if interested.

Cheers

SPEN555

IIRC,

Did the IR not clamp down on individuals setting up Ltd co's? The likes of footballers were doing this and the ruling was if the income for that company was in the majority from a single source they would **** you over for it so be careful.

If your income is from multiple sources though the above does not apply.

I could be wrong though

FATBOY_STi

Point 1 - Company tax rate depends on profits,

HM Revenue & Customs: Rates and Allowances -Corporation Tax

Point 3 - No - I think your Question is confusing "Bracket Shareholder" does not directly affect tax rate - it is "earnings".

Cheers

Deep Singh

Ok, now I'm even more confused

Can we set up a hypothetical company? It has a turnover of say £60k and a profit after expenses of £50k. There are two shareholders, Mr X who is already in the 40% tax bracket because of his day job and Mr Y who has no other income. They have a 50/50 share, ie all profit paid out equally in dividends.

What is the combined tax burden of the company + Mr X + Mr Y?
The tax burden if it was just declared as Mr X's self employed income would be 40% of £50k ie £20k. Is it less through the limited company set up?
Please ignore VAT and assume that both set ups have identical tax write offs.

Many thanks.

Deep Singh

bttt

KiwiGTI

No they aren't, but then they also have to obey the law and various judgements.

The husband and wife one is very interesting and a potential nigtmare for the government. (btw: you aren't paying them £0k a year for making tea, it's £30K in dividends) It all revolves around the Arctic Systems case.

Arctic Systems tax ruling is victory for family businesses | The Register
Lords Expected to Support Arctic Systems Verdict

There is a legal paper out there somewhere which describes the impact if HMRC were allowed to clamp down on family business (where profits are shared etc) because it goes against the notion of husband and wife being in a partnership for life. The bottom line is if HMRC were succesful in the Arctic Systems case it would throw other areas of law into disarray - eg: divorce settlements etc. It would be an unmitigated legal disaster for the government.

KiwiGTI

Deep,

See an accountant but if there was that situation I'd be paying a minimal wage to each of you - £6000 or something like that and then the maximum amount of dividends to her because you'll be taxed (higher) on it.