Tax on second income: Limited company?

nims

Hi all,

I am currently in full time employment and a higher rate taxpayer (40%). I am planning to start another job which will hopefully be worth about 30k pa. I would like to get access to this money for contribution towards deposit for mortgage.

My question is:

1. Is it worthwhile forming a limited company for the second job or should I just pay higher rate tax on all of it?

2. If I form the company: What are the tax saving ways to extract money from the company. I understand that there will be 20% corporation tax and a 25% tax if I pay myself as dividend.

3. There will be one room in my home used as home office. I have been trying to search online and while there is lot of information on various tax benefits of a company, I couldnot come up with comprehensive list of such benefits.

4. Is buying a car through the company a tax efficient way?

Apologies if some of the questions are very basic or have been answered elsewhere. Any help will be much appreciated.

nims

Don't know why the angry icon appeared!!

:):)

chrismac1

Your choices are between sole trader and limited company. If it were not for your first income, the limited company route is almost always a no-brainer for £20k plus, which is probably why you're thinking of this.

But the key tax benefit of that is paying a 7,692 salary per year with no tax and NI. In this case that would be a disaster - you'd save 20% corporation tax but pay 40% income tax on it.

TIMING is the one potential benefit, and LIMITED LIABILITY.

Timing - as a sole trader you are a sitting duck. So if you had an especially good year, you'd pay a lot of tax. You're taxed on profits as they arise.

So is the limited company as regards the 20% corporation tax. But not the shareholder! Yes there is an extra 20% tax to pay on gross dividends - 22.5% on the net, assuming total income is under £100k. But this is based on when dividends are declared. Declare it on 5 April 2014 and it counts as 2013-14 on your tax return. Declare it on 6 April 14 and it is into 2014-15.

Limited liability - whether this is useful depends on the nature of the trade. If it were running a pub, for example, I insist all such clients do so through a limited company for their own financial protection. Your personal assets are not on the line if the company goes down, but as a sole trader they are.

Company car tax is no fun. I've done the calculations for about 10 people in the past 2 years, all 10 opted to buy in their own names and charge 45 pence per business mile for the first 10,000 miles.

So overall my guess is that it's 70-30 you'll be better off with the sole trader route here. But more info. is needed to make it 90-10 or more.

anselld

nims wrote: »

I am planning to start another job which will hopefully be worth about 30k pa.

Perhaps stating the obvious, but the above choice assumes that the "second job" can legitimately be classed as self employed and does not fall foul of IR35 etc. If it is simply a second employment you wont have a choice.

getmore4less

There is little tax saving with Ltd.

The main saving is NI.

holly_hobby

Just about to say, whilst there is both NI and IT on salary, there is no NI liability on dividends - and of course you only pay tax on salary and div's that are actually drawn - and thats where timing etc can be beneficial.

Buying a car via the ltd co, if not a pool car, (which it obv isn't if you are the only employee), is classed as a BIK, and you'll be taxed accordingly - you'd be much better using your own car and taking mileage allowance.

As regards dividends - have a read of the link to help you understand - http://www.hmrc.gov.uk/taxon/uk.htm#1

Operating a Ltd Co with completion of books etc and HMRC submission, is a little tricker than straight SA, indeed I have always had my own annual ltd company submissions & personal income reporting all taken care of by my accountant - I know that everythings reported correctly, my tax is minimised and they are abreast and take care of all rerporting changes as they occur - they will also advise re IR35 and if you are likely to fall foul of any HMRC review.

Accordingly, I really would advise having your Ltd Co etc, taken care of by a qualified tax practioner - rather than relying on forum guidance (however well meaning).

Hope this helps

Holly

nims

Thank you for the replies.

The timing factor does make a lot of sense. I would be able to keep the money in the company and payout as dividends assessing my situation when it comes to filing returns.

Regards

HappyMJ

nims wrote: »

Thank you for the replies.

The timing factor does make a lot of sense. I would be able to keep the money in the company and payout as dividends assessing my situation when it comes to filing returns.

Regards

Nobody has mentioned point 3 yet regarding the renting of a room to your company. Your company can rent a room from you and claim a deduction for it...but you need to to declare the income on your personal tax return and claim a proportion of the household expenses against that income to reduce your tax liability. You could rent the room to your company for...let's say £35 a week and the proportion of your expenses should equal £35 a week so you have no additional personal tax liability.

Your company may be liable for business rates on a room used solely for business purposes...but on that small amount there usually are none to pay.

holly_hobby

nims wrote: »

Thank you for the replies.

The timing factor does make a lot of sense. I would be able to keep the money in the company and payout as dividends assessing my situation when it comes to filing returns.

Regards

But you will need to pay yourself a reasonable salary for the role, and not something ridiculously low, to avoid HMRC digging ....

Again, be guided by your accountant .... including what is and isn't reaonsable expense, charges, offsetting etc etc..

Hope this helps

Holly

Pennywise

holly_hobby wrote: »

But you will need to pay yourself a reasonable salary for the role, and not something ridiculously low, to avoid HMRC digging ....

At the moment, HMRC have no powers to argue that a director should be paid a market salary. National Minimum Wage doesn't apply to directors. Absolutely nothing (except if caught by IR35) stopping you paying little or no payroll to yourself. Some rogue HMRC inspectors try to argue otherwise but always back off when presented with the facts that they have no legal grounds for dispute.

chrismac1

Not only that, but follwing the PA Holdings tax case earlier this year, HMRC confirmed to the head of tax for ICAEW that it will not be changing its policy on low salary, high dividend owner managed companies.

But to be confident your dividends will stand up to HMRC scrutiny, you need to have:

1. Calculations showing they are legally payable from post-tax profits.
2. Dividend vouchers showing the tax credit.
3. Board minutes either voting or ratifying them.

It's this stuff you pay the accountants for in limited companies - behind this sits the training, and keeping up to date with changies in company law and key cases like PA Holdings.

NOT ONE SINGLE do-it-yourself limited company client who has come to me over the years - which is about 20 - has got this stuff even vaguely right. The maximum tax put at risk in that sample by DIY accounting is over £70k, when told about this the client concerned signed up to tax insurance like a shot even knowing it would not cover the DIY period.