Self employment- register as limited company?

tax_question_3

I'm hoping someone can help me.

OH has a job earning a regular salary in the higher tax bracket.

He also has some income from self employment, which has always been less than £3000 but is due to rise considerably next year to between £9000 and £18000. Filing this income through self assessment, as we do presently, he is liable to pay 40% tax on this. As a family we will also lose our child benefit for 2 children.

What would be the best way to minimise the tax paid on this income?

Could someone explain to me in laymans terms the benefits of him registering as a limited company?

What is a dividend and what tax would need to be paid on this?

Would he have to pay himself a wage?

Could he employ me (lower rate tax earner) as something?

Many thanks

pjclar02

Hello there

The key benefit of registering a limited company in your circumstances is that you will have flexibility about shareholdings and earnings. What this means is that you could be a director and majority shareholder so that most of the income is paid to you (which will hopefully preserve your child benefit).

The directors can be paid a salary, but in the circumstances it would probably be sensible for you to pay the profits out as dividends. This means that if the company makes a profit of £10,000, you would pay corporation tax at 20% and the remaining £8,000 could be distributed as a dividend. You could arrange the shareholdings such that the dividends are mainly paid to you as a lower rate taxpayer, and there may be no further personal tax liability. If the dividend takes you into the higher rate tax bracket, you would pay tax at 25% on the amount within the higher rate bracket.

The main downside is that the compliance costs of a limited company may be more significant, but at these levels you should be able to find a reasonably priced accountant.

Hope this helps

tax_question_3

Thanks, this is very helpful.


Would it be totally above board to have me as majority shareholder/ recipient of dividends although OH earns all the profits?

Would this be something I could set up and administer myself, perhaps if I took an online bookkeeping course? Or is it just too complicated for a novice?

Where would I start?!

Any information gratefully recieved.

pjclar02

Hello there

Currently it is totally above board to do this - if structured correctly from the start. There has been talk of "income shifting" legislation for a few years now which would aim to clamp down on the type of structure you are suggesting. This legislation has not been brought in as yet and is not on the horizon presently.

If you are confident, it is possible to administer the set-up and running of the company yourself, but you may find it beneficial to find an accountant to do this for you. In my view, a book-keeping course will not give you the knowledge you need to do this.

chrismac1

Get an accountant, there is another option which is partnership split 0% him and 100% you. Income shifting is not a theoretcial risk - Google "Jones case Arctic systems" to see how HMRC hounded Mr. & Mrs. Jones, spending an estimated £1.5m in public money on legal fees on a case which could never pay more than about £50k in extra taxes.

Income shifting is a risk to be managed if you go down this route, like any other business risk. Personally I will not take on clients who are doing this sort of thing where the spouse or partner is taking no interest in the business, clearly that does not apply here.

So get involved! Seemingly small things like being prepared to have your name, not his, on the returns filed with HMRC and with Companies House can reduce the risk of this sort of HMRC challenge. This does not suit everyone and can only be advised after knowing all of the financial background of the 2 folk concerned, and their future plans.

ceeforcat

he is liable to pay 40% tax on this. As a family we will also lose our child benefit for 2 children.

You do know that one now has to earn £50000, not simply pay higher rate tax to lose child benefit next year?

tax_question_3

Thanks. At your suggestion I have looked into income shifting, that sounds exactly what I was looking for but I am surprised it is such a grey area! It is further complicated by the fact that we are not yet married, but we can bring the wedding forward if need be.

Thanks CeeforCat, yes I was aware of that. OH's current earnings from his main employer are £47k so with his additional earnings we would lose at least half if not all of our CB.

I'm off to google 100% income shifting.

nonnatus

I echo the answer about getting an accountant.

My accountant has saved me many THOUSANDS of pounds and an awful lot of stress. I don't begrudge a penny of his (large!) fee.

Totally worth it.