Minimising Tax on profits

PoorbandTony · 6 April 2010 at 2:15PM

Hi,

I hope someone can help me.

For the past 3 years I've been doing extra work for various companies - all IT based (application development, web design etc). Things are starting to take off a bit, but I'm already in full time employment so I'm hoping to minimise tax on any extra money I make.

At the moment I'm full time for an employer in IT. This tax year (ending April 2011) I reckon I'll break the £42k mark gross, all of which is taxed via the business as PAYE.

In my 'other' earnings, I've got about £10k currently quoted for (£8k of which has been signed and agreed), and if things were like last year probably another £6-7k on top - so total roughly £17k+. If I took that as additional income that would bring my gross to a potential £60k+.

I am seriously considering setting up a limited company to place the funds into that I earn outside of work. I don't intend to use the money so I'm happy to pay the 20%(?) corporation tax then withdraw as dividends at a later date, as well as purchasing specialist computer software to help my work (which would be a business expense).

I see that setting up a company is not very expensive (less that £200 as far as I can tell). I don't believe I'd need an accountant (I've been stung before), as I already do my own self-assessment and my affairs aren't very complicated in terms of the extra business (ie. I have 4 major clients, and the odd bit of extra work - I have no expenses at all except for home electricity to power my servers!).

Are my assumptions above correct? I think it's the right thing to do as if I do nothing any extra income will definitely be charged against me at 40%. Plus I'm looking for an out into working for myself anyway.

Any advice would be greatly appreciated!

Cheers,
Tony

paulwf · 6 April 2010 at 2:59PM

What's your VAT status? It sounds like you just work for a few large companies so they won't care if you charge VAT as they can reclaim it but it would allow you to reclaim back the VAT on your purchases potentially saving a reasonable amount of money.

PoorbandTony · 6 April 2010 at 3:11PM

Hi Paul,

I'm not registered. I did think about it (maybe the flat rate scheme?) but I wasn't sure if it was worth bothering with as my company earnings wouldn't be above the £50+ threshold. Unless of course it's worth doing - although I won't be buying many things so the only thing it would give me is a more professional look I guess?

Cheers,
Tony

PoorbandTony · 6 April 2010 at 3:13PM

paulwf wrote: »

...you just work for a few large companies so they won't care if you charge VAT as they can reclaim it ...

Oh I should also point out that I don't actually work for them in the defined sense (as in, I dictate my own hours, any extra work to correct mistakes I absorb, that kind of thing). I give them a quote, they barter, we agree - then I tell them when to expect it....

fengirl_2 · 6 April 2010 at 3:40PM

You would need an accountant to produce the accounts of a limited company.
You really need to take some professional advice as a tax spepcialist would be able to take all your personal circumstances into account in making this decision.

paulwf · 6 April 2010 at 3:58PM

PoorbandTony wrote: »

Hi Paul,

I'm not registered. I did think about it (maybe the flat rate scheme?) but I wasn't sure if it was worth bothering with as my company earnings wouldn't be above the £50+ threshold. Unless of course it's worth doing - although I won't be buying many things so the only thing it would give me is a more professional look I guess?

Cheers,
Tony

VAT processing isn't any hassle if you only have a few clients and only buy from a few suppliers...just do a quarterly return online.

It might not be worth it if you really don't buy much but it soon adds up...your mobile phone bill, a computer, specialist software, printer and ink to go with it could be a few hundred pounds of VAT. Especially as if you do end up in a higher tax band I'd be putting through as many expenses as legitimate to make working life more comfortable.

As fengirl says though getting specialist tax advice is essential it will save you more than it costs.

Pennywise · 6 April 2010 at 4:08PM

The tax/accounting of a limited company is VERY different from being a sole trader. Do you know how to prepare a "proper" set of accounts in accordance with The Companies Act and Accounting Standards? Do you understand that you'll more than likely have to complete P11d form for your business expenses, even those which are legitimate business purchases. Do you know the level of penalties for being late with the company tax return, company accounts and payroll (p11d etc) returns - they soon add up to well over a thousand pounds for being just a few months late, which can easily happen if HMRC/Companies House reject your first efforts if they're not exactly in accordance with the rules etc. I'd say that an accountant is virtually essential if you're going to be a limited company.

heretolearn_2 · 7 April 2010 at 10:38AM

Alright I'm a partner in an accountancy firm, so you could say I'm biased, but you really should get an accountant on board for this. It should save you money in the long run (the whole 'stitch in time saves nine' thing really applies; sometimes it's worth paying some money in fees to save yourself a lot more overall) as a good accountant can help you with the tax planning, in addition to being able to do proper accounts etc for companies house. Their fees are a tax-deductable expense in any case.

At our practise we have a nifty bit of software that can compare your tax situation as a sole trader/PAYE and as a Limited Company, so it's easy to see whether it's financially worth converting.

Minimising Tax on profits

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