Setting up a ltd company on the internet

PilotDean

Hi!

My first time posting here... and I will probably have a few questions But here's the first one!

I'm shortly going to become self-employed, and I need some advice on limited companies.

Last week, I saw several accountants, and all of them looked at my figures and said that a limited company is the way forward. However, for various reasons (trying to rip me off, and failing to get back to me when they said they would) I don't want to continue to use any of the accountants I've spoken to.

I need to set up a company quickly - I've already started to incur some startup costs that I'd really like to come out of the company accounts, and I need a company before I can get a business loan from the bank. Over the next few weeks, I'm sure I will find an accountant I can trust - but in the mean time, my plan is to use one of the many websites that will set up a limited company for a small fee.

Being a complete novice, what I'd like to know is if there's anything I need to do, having paid to create my company. I won't have any income for approximately 2-3 months, won't be paying myself either salary or dividends until I have an income, and I'm sure I'll have an accountant to help me by then, but I will have some expenses straight away. My bank has told me it's likely I'll be approved for a loan (guaranteed by me) once I've set up my company and opened a company bank account, so I'd want to arrange that asap too.

Is there anything I need to know???

Thanks!

Dean

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firstinflight

Ask yourself whether you really need to set up a ltd company at this stage of the business. There can be benefits, but there is a much greater compliance burden. If you suspect the accountants you saw were unscrupulous types, then they might have been trying to push you down that route because it would mean bigger fees for them.

Seeing as the bank wants a guarantee from you anyway, it kind of renders the main benefit of a company- limited liability- redundant anyway. Of course, I don't know the nature of your business and i might be way off the mark, it's just that there seems to be a bit of a misconception sometimes, that you always have to set up a company to trade with.

steve1980

There is no need to instantly start a limited company on day one. Assuming that you have notified HMRC that you are going to be self employed then start as a sole trader and work up to it.

Unless there is a major reason for wanting the limited company (such as racking up the debt then closing it down just as quick) then take things slowly and enjoy the ride.

PilotDean

Thanks for the input. The reason for wanting a ltd company is to reduce the tax I'd pay. All 3 accountants I spoke to independently gave me the same advice to go down this route. And friends and colleagues in the same industry with a similar business model have advised me the same. (All of them using accountants who are too far from me geographically, unfortunately, otherwise I'd follow their recommendations of who to use.) So I'm pretty sure that I'm doing the right thing by wanting to start a company.

Thanks,

Dean

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steve1980

PilotDean wrote: »

Thanks for the input. The reason for wanting a ltd company is to reduce the tax I'd pay. All 3 accountants I spoke to independently gave me the same advice to go down this route. And friends and colleagues in the same industry with a similar business model have advised me the same. (All of them using accountants who are too far from me geographically, unfortunately, otherwise I'd follow their recommendations of who to use.) So I'm pretty sure that I'm doing the right thing by wanting to start a company.

Thanks,

Dean

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An accountant is never too far!

We live in the digital age now, all receipts can be scanned in and saved, you can still keep your paper originals, and income/expenditure can be done using Excel or a similar programme.

Mistral001

PilotDean wrote: »

Thanks for the input. The reason for wanting a ltd company is to reduce the tax I'd pay.

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How is this done? Surely if we take money out of the company we have to pay personal income tax at the same rates as everybody else.

chalkie99

It's not so much the tax as the National Insurance contributions.

By taking a low wage a director can take extra funds in the form of dividends.

The company pays Corporation Tax at 20% on profits and as the tax is already paid the director draws the rest without further penalty up to the higher tax band but, as there is no National Insurance on dividends, it effectively saves money.

Mistral001

chalkie99 wrote: »

It's not so much the tax as the National Insurance contributions.

By taking a low wage a director can take extra funds in the form of dividends.

The company pays Corporation Tax at 20% on profits and as the tax is already paid the director draws the rest without further penalty up to the higher tax band but, as there is no National Insurance on dividends, it effectively saves money.

Yes, but any profits that you pay corporation tax on will stay in the company. You cannot get hold of it for personal expenditure.

Also, National Insurance Class II is just £2.50 a week- not a big saving.

Are the tax advantages to do with leaving money in the company when you have a good year so that you are not in the higher tax band with personal tax and then taking it out in a poor year?

I see dividend taxes are at a lower rate than personal income tax rates. Is that maybe what draws people to a Ltd company?

antrobus

Mistral001 wrote: »

....

Also, National Insurance Class II is just £2.50 a week- not a big saving.

...

If the comparison is with self-employment then your have Class 4 as well - 9% on profits between £7,225 and £42,475, and 2% thereafter.

If the OP has taken professional advice, and that advice is to incorporate, then I for one would not argue to the contrary. Buying an off-the-shelf limited company is fairly straightforward. That and a bank account gets you going.

chalkie99

Mistral001 wrote: »

Yes, but any profits that you pay corporation tax on will stay in the company. You cannot get hold of it for personal expenditure.

Also, National Insurance Class II is just £2.50 a week- not a big saving.

Are the tax advantages to do with leaving money in the company when you have a good year so that you are not in the higher tax band with personal tax and then taking it out in a poor year?

I see dividend taxes are at a lower rate than personal income tax rates. Is that maybe what draws people to a Ltd company?

No, you have misunderstood.

Once the Corporation Tax has been paid by the company the money can be paid as dividends (up to the higher tax bracket) without any further deductions.

Example:

Company profits £30,000

Pays director £30,000 - leaves no profit for company to pay tax on but -

Director gets tax free allowance £7475 and pays tax on balance of £22,525 @ 20% = £4505

He also pays National Insurance at 12% on earnings over £139 per week.

This would give him a NI bill of £2732.64

By paying himself a low wage of say £6000 a year it works out like this:

Company profit £30,000 minus wages paid of £6,000 gives taxable profit of £24,000 @ 20% = £4800.

Director pays no tax or NI on the £6,000 wage as it is under the personal allowance.

He then draws the net profit (£24,000 - £4800) of £19200 as a dividend and pays no extra tax or National Insurance.

He has ended up with wages £6000 + dividend £19200 = £25200


The first way he would have only pocketed £22762.36

Mistral001

Thanks Chaulkie

Very well explained