Most tax beneficial way to set up Ltd company

rooperasmus

Hi,

My other half and I are setting up a limited company together and are wondering what is the most tax beneficial way of doing it.
We were thinking of both being set as directors with 50:50 shareholding. I know there is a way also to still be 50% owner, but just be a shareholder. How exactly does this work?

I called Companies House, but that was literally all the info I got from them. Is a call to Inland Revenue more appropriate? (We haven't appointed an accountant yet, but are in discussion with a very strong candidate)

Thank you in advance!!!

Pennywise

HMRC don't give advice on tax planning etc., so no point wasting your time calling them.

You need to see an accountant - this kind of thing is their bread & butter.

Other than that, you could have a look around the Businesslink website which has a lot of information about setting up etc and is a very good starting point.

rooperasmus

Thank you for your help, I think we just need to make a decision on the accountant - today in fact...

I have looked on Business Link website too, its just an overwhelming amount of info on there to plough though, but will have another look!

lovinituk

It doesn't make any difference to tax how you split the shares as directors. What makes the difference is how much you pay yourselves as a wage and how much you draw from the business as dividends. As above, go and see an accountant and they will explain it all to you.

pjclar02

Surely....

lovinituk wrote: »

It doesn't make any difference to tax how you split the shares as directors.

contradicts...

lovinituk wrote: »

What makes the difference is how much you pay yourselves as a wage and how much you draw from the business as dividends.

The split of shares will directly impact on the level of dividends to be drawn by each party. Therefore the shareholding splits makes all the difference to the tax planning, expecially if there is a large disparity in the respective earnings outside of this limited company.

lovinituk

pjclar02 wrote: »

Surely....



contradicts...



The split of shares will directly impact on the level of dividends to be drawn by each party. Therefore the shareholding splits makes all the difference to the tax planning, expecially if there is a large disparity in the respective earnings outside of this limited company.

Not really, because you don't pay any personal tax on the dividends - the tax has already been paid on the profit in the form of corporation tax, which has nothing to do with the share split.

chrismac1

Get his set up properly and you will save thousands. It all depends on your personal tax circumstances, especially the other income you have outside of the company. Often it works out that Husband gets 500 Ordinary shares and Wife 500 A Ordinary - equal voting rights but the opportunity to vary the dividends.

But not always. Get specific advice fomr someone who has PII cover!

MoneySavingUser

lovinituk wrote: »

Not really, because you don't pay any personal tax on the dividends - the tax has already been paid on the profit in the form of corporation tax, which has nothing to do with the share split.

Wrong.....You receive a 10% tax credit on dividends and dividends are taxed at 10% in the basic rate band so there is no tax to pay, but once you go into the higher rate band they are taxed at 32.5% so after the 10% tax credit you have to pay 22.5% tax on them! (then in additional rate band 42.45-10% = 32.5% to pay)

DJBenson

I have just set up my limited company as the vehicle to me providing business analysis services on a contract basis. How you split the shareholding depends entirely on your own (and your partner/wife's) situation and it will be different for each person.

As my wife is in the 20% tax band, I created 100 ordinary shares and split them 50/50 with my wife as it was the most tax-efficient way to do things, but it does mean if I personally want any money out of the company in the form of dividends that I need to pay the other half what I pay myself. Not a problem for us as we are saving for a deposit on a new house so doing it this way means we put equal shares into the pot.

I would heed the advice above and speak to an accountant or get reading. I recommend having a look on https://www.contractoruk.com - there is a wealth of information about company formation that will help you along the way.

Good luck with your venture - I've been doing it for a month (3 invoices) and my bank balance tells me it was the best decision I have ever made

Daniel_Elkington

With a company there are a few issues as regards remuneration.

Firstly is the tax status of the company.

After 2 years you qualify for Business Property Relief for IHT, in your case, meaning you get 100% relief for IHT purposes.

This is a good time to review your life insurance as you can use the existence of the company to get cheaper life cover.

Capital gains tax can also be avoided/ reduced on incorporation.

In terms of remuneration:

Salary should be paid via PAYE.

Dividends can be distributed to shareholders out of profits. There have to be profits to pay dividends. There do not have to be profits to pay salary.

Dividends must be split according to shareholding. If 100K were distributed to three parties with a 50/30/20 split of the shares then the first party gets £50K, the second £30K and the third, £20K.

If someone is not involved in the company they can have a shareholding and get a share of the profits.

If someone is involved then they should take a salary as well as receive any dividends.

p.s. Don't distribute all the profits to shareholders, you want some dividend cover, For a small company if you have £100K profits it would be a good idea to distribute just £25K as dividends and the rest is kept within the company to re-invest and expand.

These profits can also be used to pay future dividends. If you have £100K profits in the first year and pay out £100K in the first year then make losses in the second year you cannot pay out any more dividends.

If you only pay out £25K in the first year and make £50K losses in year 2, you can still pay out £25K dividends again...

This is a concept called dividend cover

(=Earnings per share (EPS)/dividend per share (DPS))

You want at least a Dividend Cover of 2 for a healthy future for the company.

CKhalvashi

MoneySavingUser wrote: »

Wrong.....You receive a 10% tax credit on dividends and dividends are taxed at 10% in the basic rate band so there is no tax to pay, but once you go into the higher rate band they are taxed at 32.5% so after the 10% tax credit you have to pay 22.5% tax on them! (then in additional rate band 42.45-10% = 32.5% to pay)

I was just going to mention that I wish I could get tax-free dividends.

You're better off incorporating up to £1m profit per shareholder (that's approx., I don't know the exact figures), but a decent accountant will make it much, much more beneficial than that.

CK