Self Emplyoyed v Ltd Company

shads1973

Hi all,

Just finishing my self assessment for last year, had around 60k turnover for a 34k profit.

This tax year it seems I will be doubling that both for turnover and possibly profit too.

So first, I obviously need to become VAT registered as I'll be going above the threshold.

What are the tax benefits of setting up a ltd company as opposed to continuing being self employed?

pcgtron

What business are you in?

TheCyclingProgrammer

The main tax benefits are being able to draw earnings as dividends which don't attract NIC and more flexible tax planning...just because your company has plenty of retained profit, you don't have too extract it all. You can leave it in the company and use it to build your business up or leave it there for when business is slow. Effectively you can avoid becoming a higher rate tax payer unless you need to.

You also have the option to extract any profit you've built up in the company in the future if and when you close your company down as a capital distribution which, assuming you're eligible for entrepneurs relief, is taxed at only 10%.

There are other possibilities like being able to split your income with a spouse, making pension contributions etc, although this requires professional advice.

However the cost of this is extra admin and you'll probably want to get a good accountant who will be able to advise you in much more detail. This is just an overview.

antonic

One plus point of being a Ltd Co, is that any debts you *may* accrue belong to the Co and not you personally (as a self employed person).

One negative point (as already made The Cycling Programmer) is the extra cost of setting up and running the Ltd Co.

If I was in business , I would go down the Ltd Co route.

Pennywise

It's not necessarily the extra costs of a company, which can be remarkably cheap if you avoid being ripped off by an accountant who tries to pull the wool over your eyes!

It's more the control and admin side of things, i.e. the money isn't yours, so you have formality to deal with when you take something out, i.e. whether it's payroll, dividend or expenses reclaim. More important to have some decent book-keeping software that keeps you on top of things, like Freeagent which has running totals for all taxes and running totals for distributable reserves (max dividends at that time), and will do the submissions to HMRC for VAT returns and payroll RTI. You just have to be more switched on to the deadlines and submissions needed.

Of course, you can get an accountant to do it all for you, at a cost, but most people would be quite capable of doing the book-keeping, payroll, VAT returns, dividend paperwork, themselves and just leave the accountant for the year end accounts and corporation tax return.

The year end accounts aren't much more work than sole trader accounts if you've done proper book-keeping and have good control over the monies (i.e. not treating the company bank account as your personal kitty and helping yourself). With the latest exemptions, the formal accounts are a lot let pages and far less detail, so no longer any need for the accountant to spend a few hours on several pages you don't understand and no-one reads anymore.

As for other costs, maybe bank charges, maybe a bit more insurance, but certainly not thousands.

shads1973

Thank you all for your feedback so far. I work in online advertising. It's just me, myself and I working from home with a laptop and internet connection.

I have spoken to an accountant, he advised of costs around £1100 for year end accounts, and 200 for quarterly VAT returns. He mentioned few other nominal costs of the setting up of the company formation. (All of this plus VAT).

I guess I'm asking is the roughly 2k a year outlay to go ltd and have an accountant manage my affairs, likely to be cost beneficial against say a 60k turnover?

Savvy_Sue

antonic wrote: »

One plus point of being a Ltd Co, is that any debts you *may* accrue belong to the Co and not you personally (as a self employed person).

As long as you haven't acted improperly as a company director, and as long as eg loans haven't got your personal guarantee attached. Usually any lending to a small new ltd would require your personal guarantee ... It's not a 'get out of jail free' card.

Delphina

The accountancy fees are tax deductible... Although the OP saves 20-40% in real terms, it is still something to bear in mind. It sounds like the business keeps growing, IMHO, I would go down the limited company route, if I were in the same situation! Good luck.

TheCyclingProgrammer

shads1973 wrote: »

Thank you all for your feedback so far. I work in online advertising. It's just me, myself and I working from home with a laptop and internet connection.

I have spoken to an accountant, he advised of costs around £1100 for year end accounts, and 200 for quarterly VAT returns. He mentioned few other nominal costs of the setting up of the company formation. (All of this plus VAT).

I guess I'm asking is the roughly 2k a year outlay to go ltd and have an accountant manage my affairs, likely to be cost beneficial against say a 60k turnover?

You can do better than that.

For starters, I second Pennywise's FreeAgent recommendation. Your welcome to PM me if you'd like a referral code - I'm not sure I can post it on here. It will take care of your bookkeeping for your, it will do your VAT accounting and quarterly VAT submissions at the click of a button, it will manage your payroll and RTI payroll submissions if you want to pay yourself any kind of salary using PAYE, it will give you a real time view of your company's finances - handy to know how much profit you have available to distribute as a dividend - and will also generate dividend paperwork for you too. It does even more than all of this.

You can quite easily get away with a FreeAgent account and pay an accountant to take care of your end of year accounts and corporation tax return - I used to have an accountant do this for me for £550.

Alternatively you could pay a monthly fee to an accountant - ideally one who is familiar with FreeAgent if you go down that route. I currently pay £90/month for my accountant. Again, I'm happy to recommend them to you if you want to send me a PM.

Finally there is the fully managed option where your accountants will also do your bookkeeping for you and basically take care of everything. This will obviously cost more. Some accountants are FreeAgent partners and can offer it as part of their monthly fee.

chrismac1

The costs you've been quoted seem on the high side. My standard rate is £850 plus VAT for limited company contractors, which includes 4 flat rate VAT returns and monthly PAYE. This is about par for the course in my local area which is the Lake District.

Unless you've done book-keeping, VAT returns and PAYE before I would NOT attempt DIY. There are numerous pitfalls and HMRC waiting to fine you if you get it wrong, Companies house if you file late which can easily happen if you can't fill out the boxes properly.

I've had a few DIY clients come to me over the years, and with few exceptions they were all in a mess. The worst case was one where HMRC were threatening bailiff action. But in fact she'd made some real howlers, by the time I'd sorted it HMRC were owing her business a repayment!

I've also had a client come to me just 4 months ago who had been using Clear Books and taking dividends based on what Clear Books was saying - note Clear Books is similar to Free Agent. He'd fallen out big time with his previous accountants as he'd taken £20k more in dividends than he had profit, thanks to some DIY accounting making it look like he had £20k more profits for dividends than he actually had.

In my view a better option is to hire an accountant for year 1. Then if you want to take it on for year 2 - and are OK with the loss of time when you could be getting in more advertising - at least you'll have something to follow.

shads1973

Thanks again for all your replies, info and good wishes

Definitely don't foresee myself wanting to manage the in's and out's of a limited company and associated VAT returns. Self assessment is one thing, but beyond that not sure. Understanding what to claim, not to claim for working from home. PAYE? Travel allowances for the few times I do see clients. Many other things which I never included in self assessment for sake of getting wrong I hope an accountant will earn his wage and help me with.

As for the costs, it was one recommended accountant local to me in SW London. Will enquire and try and get a few more recommendations. But thanks for the feedback to what can be achieved

General feedback appears to be there's definitely a saving to be made in going ltd/corporation tax route then carry on as self assessment