Private Limited Company

sweetilemon

Hi, I posted this on employment but no answer so thought i'd see if this was a better place for my question. If you have invested in a private limited company what tax do you pay from profits? Is it the same as taking a wage? Thanks in advance!

oldfella

depends what you mean by "invested". If you are the owner of the company, then the company pays corporation tax on its profits. This varies on how big they are, currently 21% upwards.

LittleVoice

The company pays corporation tax depending on level of profit and an individual would pay income tax if their investment in the company paid them dividends.

oldfella

dividends are not taxable if you pay basic rate tax, its already paid tax by the company

LittleVoice

oldfella wrote: »

dividends are not taxable if you pay basic rate tax, its already paid tax by the company

Bit like PAYE - the individual is due to pay tax on their wage/dividend/savings interest but the organisation deducts tax before handing it over.

oldfella

but the organisation deducts tax before handing it over.

---

not quite - dividends are paid out of taxable profits, so it doesnt matter whether the net profit is retained in the company, or paid out as dividends, its still taxed. The benefit compared with paye is you dont pay national insurance.

dave2

NO.

Dividends ARE taxable.

But they are paid over to you net of basic rate tax, so no if you are a basic rate taxpayer there will be nothing extra to pay. That may have very similar result for many people but it is absolutely not the same thing, which will become very very clear if you slip into being a higher rate tax payer.

dave2

sweetilemon wrote: »

If you have invested in a private limited company what tax do you pay from profits?

The company itself pays corporation tax on it's profits. The company itself is a "legal person". The company should get itself an accountant to help with it's filing and tax affairs.

As for you personally, well if you are running the company as your job you should see your accountant. Chances are he'll suggest drawing a salary of around £5,500 to cover your NIC.

If you simply bought some "ordinary" shares in a friend's company then you would probably just get a dividend. If all of your earnings (from all sources) are not going to breach the higher rate band then you probably don't need to do anything further as regards your personal tax.

However there are various other possibilities, e.g. you may have just made a loan to the company, a regular loan that pays you interest, which is taxable like any other interest.

You may also be selling your shares in future for a gain, which is subject to capital gains tax.

I'm surprised you were not briefed on this when making the investment which I find a little concerning. This area can be quite complicated for example the shares might qualify under the Enterprise Investment Scheme. If you're talking about a large sum of money I suggest seeking an accountant, often they'll offer a free initial consultation, though you should have done this before making the investment (it may not matter in the end, but then again it might...).

sweetilemon

Thanks everyone thats a great help. Don't really know how it all works will need to do my homework before parting with any cash. I wouldn't be a main share holder it's to help fund a start up business for my partner. I'll still have my full time job so wouldn't need to worry about NI. I just wondered how it works when getting my investment back and if it was best to take a wage for my input. Thanks again!

LittleVoice

sweetilemon wrote: »

Thanks everyone thats a great help. Don't really know how it all works will need to do my homework before parting with any cash. I wouldn't be a main share holder it's to help fund a start up business for my partner. I'll still have my full time job so wouldn't need to worry about NI. I just wondered how it works when getting my investment back and if it was best to take a wage for my input. Thanks again!

If you would be contributing your time as well as money in the form of buying shares and received a wage in return for your time, then NI should be considered in the calculations. Unlike tax which is an overall annual amount, NI is payable on each of your employment streams where they reach the minimum threshold.

dave2

sweetilemon wrote: »

Thanks everyone thats a great help. Don't really know how it all works will need to do my homework before parting with any cash. I wouldn't be a main share holder it's to help fund a start up business for my partner. I'll still have my full time job so wouldn't need to worry about NI. I just wondered how it works when getting my investment back and if it was best to take a wage for my input. Thanks again!

Glad to see you haven't already jumped in. The beginning is a critical time for professional advice and tax planning, there's a lot of good options that can really make a difference.

Just for example, one suggestion might be to put minimal money into the actual shares and the rest would be a loan. This means you could draw money out later as a refund of the loan (no tax!) rather than dividends. It may also be possible to secure the loan so reducing your risk a bit (a shareholder is dead last to see money if it all goes wrong). On the other hand however, putting all the money in as shares makes the balance sheet look better which may be necessary for credit. The share money may also qualify for Enterprise Investment Scheme.

Since you already have employment income you probably do not want to be taking a salary from the company as it will incur employer (12.8%) and employee (11%) national insurance.

Please go see an accountant!