Questions about limited companies

Chris, Running a limited company correctly can be complex, however it is often the most tax efficient way to go. It sounds like you have the basic idea of what to do. PAYE - you should aim to pay yourself the tax free amount £4615 per annum if you have no other incomes. Things get more complex in year one where you have been a sole trader, and it is often calculator time. As a director this is an annual thing, so it doesn’t matter what the pattern or payment is so long as you do your PAYE returns. I personally put my salary through my directors loan account, and draw money as required by direct bank transfer. Dividends are a little confusing sometimes. They are paid out of post corporation tax profits. Corp tax is 22.5% on marginal profits between £10,000 and £50,000. The first £10,000 it tax free. As a basic rate tax payer you pay no extra tax on the dividends. When you hit the higher rate (total earnings over £37k) there is an extra 25.75% on top. In terms of paying dividends this is critical that you do it right, or you end up with an unintended salary and all sorts of problems. You therefore need to be very careful when declaring a dividend that it is properly noted in the board minutes and that you have enough distributable reserves. In practice this means drawing up draft accounts and making reference to them before declaring the dividend. There isn’t any set format for these, but they need to fairly accurate to avoid declaring an illegal dividend. You could in theory declare one monthly, but what most people do is draw on salary and directors loans though the year, and declare a big one at the year end/quarterly, and then take out the cash in the business allows. Quite often you have far less cash in the bank than you can legally distribute due to money tied up in the cash cycle. Directors loans need to be treated with caution however. On expenses, you can simply submit an expense claim form, clearly detailing the expenses you have incurred on behalf of the business. You should be able to get at least a debit card from most banks unless you have a poor credit rating. This should improve over time unless you have personal debt issues. I know I am going to sound terribly biased, but this really is a complex area it would be wise to appoint an accountant to look after you from the outset. I tend to find the people who I help from the beginning have much lower bills than the ones who have tried to DIY and got into a bit of a mess. I offer a professional and comprehensive service to start-ups, with a mind to keep things as economic as possible in the first year of trading when cash is at its tightest. Anyhow I wish you every success. Regards James Smith Chartered Accountant www.uktaxshop.co.uk 01284 764436
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James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773

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Your indispensable guide to Small Business Bookkeeping, Self-Assessment & VAT

Thanks for the answers James. So I only have to do PAYE returns once a year for directors? The dividends thing I don't understand. Somewhere on the inland revenue site I read that you have to pay 10% tax on dividends, then Iw as reading in other places that you could earn £14615 per annum and not pay any tax at all. So if the company made £20,000 in a year and I paid myself a salary of £4615, I gather I would pay corporation tax of £1211.62 (that being 22.5% of £5385, first £10,000 being free of corporation tax). That would leave £14173.38 profits after corporation tax. If I then paid in this dividends, would I have to pay tax of 10% on that or none at all? How would I submit an expenses claim form? What information should I include on it and should I do that monthly? Would the company then pay me by check for my expenses? What sort of fees do you charge for what services? Money shouldn't be too tight as I have been trading as self employed for 3 years in my line of internet business so I know what I'm doing now. I won't need to draw money from the company for a while as I have enough savings to pay the bills for a while.
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Chris Shaw
Easy Dollars Ltd Director and Shareholder
http://www.easydollars.biz

Chris, Re PAYE, at a minimum you need to submit quarterly returns if you subscribe to the quarterly scheme. In practice this may mean sending in blank returns, but as it doesn’t take very long to put a blank slip in the prepaid envelopes provided. Regarding your sums, your are alsmost there. To recap, From the £20,000, £4615 comes direct to you as a salary. £1211 is corp tax, leaving £14,174 as a dividend in the company. Now the 10% tax I ignored above as is a bit odd. With the dividend you receive a "notional" tax credit of 10%, ie although you receive £14,173, cash as far as the tax man is concerned you actually get a gross dividend of £15,747, with a tax credit of £1,574. Lower rate tax payers pay 10% on dividends, and so as you have already got the tax credit, there is no more to pay in your hands. As I say this is a bit odd, in effect you get in your hand what you pay out as a lower rate tax payer, so don’t worry too much about the 10% on dividends. The good news is that in the above example you have an average tax rate of just 6%, and its all legal – as a sole trader you would have paid an average 22% tax, wasting approximately £3,300 in cash terms. Re you expense claim form, this would detail the date and nature of the expenses incurred on behalf of the company, ie showing why they are not personal expenses. You can submit as often as you like, and pay by what ever method you chose. Monthly would make sense. I also note as you have been running this for three years a sole trader, you have a substantial opportunity to sell the "goodwill" of your sole trader business to the ltd company. This is a good way of getting some tax free money if arranged correctly. Accounting fees will vary depending on how much you needs to be done, please give me a ring or drop me an email if you would like a bespoke quotation - typical fee is around £400-£500 for the statutory accounts, corporation tax and general help running the company correctly. This is payable at the year end after the accounts etc are submitted. I can also quote for bookkeeping, PAYE, VAT, Companies House returns, management accounts etc if required. I dont like to "sell" too much on here, so please give me a ring if you want to to discuss things of this nature. Regards James Smith Chartered Accountant www.uktaxshop.co.uk 01284 764436
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James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773

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Your indispensable guide to Small Business Bookkeeping, Self-Assessment & VAT

Thanks again James. That sounds strange about the dividends, I'm not sure how that works. Anyway for now, I have enough savings to get by without taking any cash from the company so what I will be most likely be doing is paying some sort of dividend in March and then starting a regular small salary in April. Not sure what to do about the dividends then. So I'm not sure I need much help before then, or do I? As long as I keep records of income and expenses until I'm even thinking of any dividends, I'm guessing I should be ok without any paid help for now? Would you think so James?
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Chris Shaw
Easy Dollars Ltd Director and Shareholder
http://www.easydollars.biz

I said the divis are weird ! Regarding engaging proff help, It’s entirely up to you Chris. Personally I would suggest you get someone sorted out sooner rather than later so you have someone to 'phone if you get any problems - you aren’t likely to increase your total cost in fees, and you might reduce them (not to mention your tax bill) if this avoids having to unwind a mess at year end. In addition in your circumstances, the longer you leave it, the less likely you will be able to get a valuation of goodwill passed between you as a sole trader and the new limited company agreed with the IR - you could be throwing away a good few thousand pounds here. You are supposed to get this agreed soon after the transfer, and have all the legal documents of the sale in place. You risk having such an arrangement overturned if it is clear it has been set up late on purely to avoid tax. Anyhow I’m hardly independent, and if you don’t take any money out of the company, you can’t really go too far wrong. However I don’t see any advantage, and many disadvantages in waiting to the end of your year to engage help for something you are going to need in the long run. The only time it would make sense to hang on is if the person your engaged wanted to bill you upfront – this is not normally how things work. Regards, James Smith Chartered Accountant www.uktaxshop.co.uk 01284 764436
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James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773

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Your indispensable guide to Small Business Bookkeeping, Self-Assessment & VAT