Paying yourself from a LTD company as freelance?

seismicryan

Hi Guys,

Firstly I'd like to say I'm going to discuss this with my accountant next week but I wanted to see if anyone here has done the same thing I'm thinking about before I go to the accountant...

I am MD of a LTD company, set up just under 2 years ago... as yet we have not paid any salerys or dividends... mostly because we had one customer that did not pay a very substantial bill so we have been trying to claw back to even ever since....

We are getting to the position now where we would like to be able to pay a little bit out in saleries and dividends... however I do not want to be stuck paying out set amouts each month if sales are not there...

So... I was wondering can we pay people as sort of "freelance" workers... like, say "Bob" does 10 hours one month that we are going to pay him for, so we cut him a cheque for £100.00, write that into our accounts, and as "Bob" is self employed he marks that in his own accounts, and pays his National Insurance and Tax etc himself meaning that we, the Ltd company, does not need to get involved in that?

I know I may be looking at this a little simplistically, but am I on the right lines?

Cheers for any advice,

Ryan

hippyadam

It's not surprising to hear one of your customers is already trying to stiff you within your first two years It seems freelancers and new start ups are always targeted by unscrupulous "business" people...

Look around on the board for debt recovery, there are a fair few threads on how/what/where to do with debt recovery I know, i've posted on most of em

As for freelancers/consultants, in a nutshell you can do what you are asking. But your accountant can guide you through the process. It is probably worth getting the right contracts drawn up, just to protect yourself.

Also, if you are telling someone what to do in a boss type fashion irrespective of what the contract says they are an employee... IR35 (ask your accountant) may be an issue, however the new gov have promised to scrap it so it may not be one for long...

Oh hold on, are you "Bob" for the purposes of this thread? because if you are the answer will be radically different!

seismicryan

Cheers for the response... i'll expand a little because I wasnt very clear...

Firstly the customer who didnt pay... a customer paid us by letter of credit, and after problems with th bank it wasnt taken care of on time, had to be cancled, then the customer couldn't pay... has been a complete mess to be honest... but is a complete other story...

as for freelancing...

the company is owned by 6 people, 5 of which are directors... the 5 people do various bits of work for the company, but have as yet not taken any pay... I am the managing director and do the vast majority of the work for the company and have taken no pay either..

so, what i was wanting to do was pay the people that do work for the company only when we have the money available... so, say this month we make a profit of £2000, and decide to pay out £1000 of this for work done this month... I, and the rest of the directors submit a total of 100 hours work, and the £1000 is paid out therefore at £10 per hour... so If I have have worked 60 of those hours, I get £600...

I would then submit that to my own self emplyed accounts, and pay the appropriate tax and national insurance when i do my tax return...

does this make any sense? lol

Ryan

BoGoF

You really need to get some professional advice before you get yourself/company in serious trouble with HMRC.

You want to pay your directors (who are employees of the company) tax/NIC free then they declare it through their tax returns?....eh NO !

Employees = PAYE must be operated, unless you pay it as dividends.

fguk

You need professional advice, but I note from your first post that you are getting that.....so no need to preach to you!!

My view is, if the directors are shareholders (which it sounds like they are), then the directors can be paid dividends, whenever you see fit (although it needs to be in proportion to the shareholding i believe), and that income does not get NI`d, but as soon as it goes out of the company it will be subject to corporation tax (payable by the company, but then no personal tax is due on it for standard rate taxpayers).

What the directors do with their dividends is up to them and their tax regimes personally as you rightly say.

My view only, and it may even be (partially) correct!

Savvy_Sue

I'm just wondering about your 6th person though, have they been working for no pay?

You do need to be clear whether that person is employed or self-employed. They could be employed on a zero hours contract, ie not paid when there's no work, but you can't opt out of PAYE, National Minimum Wage and employer responsibilities just because it suits you.

seismicryan

the 6th person was not available to sign the forms to declare as a director when we set up, and so for now is just a shareholder...

all the rest of the directors are shareholders, yes...

as of yet no-one is actually emplyed by the company, and no one as received any pay or any dividends...

I know we can pay directors with dividends in accordance with their share holdings, however not all the directors actually do any work for the company, only small tasks when required, as they have full time jobs. I am the only one that does not have a full time job as an employee.

Yes I have an appointment with the accountant next week, and I want to discuss starting to pay out and paying dividends but I just want to get an Idea of whats possible...

Cheers
Ryan

Pennywise

2 easy options

1. Dividends in proportion to all shareholders holdings
2. Payroll to those directors who've earned it.
Or a combination of both.

Payroll is more expensive in terms of tax and NIC but it is safer in terms of protection for the worker being paid if it is backed up by a service contract meaning the director still gets his money as per the contract in case of future board level disputes later down the line, and is to some extent protected by employment law if he doesn't get the pay his contract says he is entitled to. In my mind, the security of a service contract more than pays for the higher tax and nic.

The company can't pay a director in a self employed capacity as a sole trader. It's a big no-no for several reasons.

A possible third alternative is for each director to have their own separate limited company, then their company can invoice your company for consultancy fees. This gets around the prohibition of paying directors as self employed sole traders.

If none of the above appeal and you are willing to spend some money on changing the co's articles etc., you could set up alphabet shares . you have A shares, your co shareholders have B -F shares respectively. Then the directors vote that there'll be a dividend on the A shares but not the others to pay a dividend to you only. This gets complicated, messy, and you have to be absolutely pedantic with setting it all up and running it properly - the paperwork has to be 100% right. Your accountant is the best person to talk you through this. It only works if the directors agree so if there's a fall-out, you could have big problems.

I must admit I never like the dividend route for any firm other than a one man band or husband/wife scenario as it is essentially discretionary and relies on agreement between the shareholders. When you have several unrelated people, all doing different amounts of work, then the dividend route is problematic. The service contract route under PAYE is more secure and better for the worker although the cost is the higher tax and nic.

paulwf

Do you need so many directors and shareholders if you think paying as freelancers would be better? Having a company owned by just 2 people might give you more flexibility?

Premier_2

As others have said, employees need to be paid under PAYE. Contact HMRC now, before HMRC contact you

As for fixed payments, well there's nothing to stop you paying your employees on a casual basis i.e. for the hours/days they actually work only, rather than an ongoing amount per week/month etc..

Of course all this should be in the written contracts of employment your employees should have been provided with.

As others say, get professional help; it sounds like you need it.

Premier_2

seismicryan wrote: »

...I know we can pay directors with dividends in accordance with their share holdings, however not all the directors actually do any work for the company, only small tasks when required, as they have full time jobs. ...

No, you may be able to pay shareholders dividends, but not directors (unless they also happen to be shareholders as in your case)

But all shareholders should be paid the same dividend pro-rata to their shareholding (assuming they all hold the same class of share). It doesn't matter if the shareholder has done any work.

Most shareholders are not usually company directors, or even employees.
The shareholders own the company (and so can share in any profit distribution). The shareholders appoint directors to run the company on their behalf. The directors are usually employees of the company.
Why have you directors that don't contribute to running the company?