Self Employed Ltd company

cjcjcj

I have a question about the interplay between Corporation tax and Income tax.

I run a small limited company alongside my day job and there is income, and profit arising through this. All money for the business goes through a separate bank account, alongside my main one.

If for example in the year the following happened, what would the consequences be tax-wise?

The company has sales of £50,000 and Expenditure of £25,000.
During the year I transfer £20,000 to my personal account.

I would assume that I pay income tax and NI on the £20,000, subject to personal allowances (in combination with the income from my other job). I then pay corporation tax on the remaining £5,000.

I complete a self-assessment tax return each year, so I would hold the tax back and pay it at the end of the year. How does it work with HMRC in terms of making real-time payments as opposed to a year end one?

However, if the money is retained in the business at the end of the year then the corporation tax is 20%. If I then pay myself some of this in the next year then I'm taxed again at 20%?

Should I not make sure I pay myself all retained profits before the end of the year, consequently paying zero corporation tax, but income tax instead as a one-off?

TheCyclingProgrammer

First things first, I'm not an accountant, but I do run my own Ltd company so I can try and help you. But it really sounds like you need to be speaking to your accountant and if you don't have one, you need to get one.

If your company has sales of £50k and expenditure of £25k, then assuming all of that expenditure is allowable for corporation tax and that expenditure does not include any remuneration, that leaves you with a taxable profit of £25k.

How were you intending to take that £20k out of the business? You can't just transfer it to your personal account - its not your money!

There are several ways of extracting funds from your company but the main ones are:

* Direct remuneration - salary (+ any reimbursed expenses) and pension contributions. These are part of your company's pre-tax expenditure and so reduce its taxable profit.

These payments are obviously taxable on you personally and you would have to operate PAYE on any salary. There may be further tax implications on expenses and pension contributions should be discussed with an accountant and IFA.

* Dividends. These are taken from your company's distributable reserves, i.e. its retained profit after corporation tax. You are free to take a dividend whenever you want (I'm assuming you're director and the sole shareholder here) so long as a) there is sufficient retained profit and b) you draw up the correct paperwork (board minutes and a dividend voucher).

Dividends also incur income tax but are taxed differently and depending on how much you take you may have no further tax to pay. The basic rate for dividends is 10% but all dividends have a 10% tax credit in recognition of the fact that YourCo has paid corporation tax on the profits already. This means if you're a basic rate payer, any dividend you take is treated as net of the tax credit and there is no further tax to pay (example: if you take a £9k dividend, its actually treated as £10k gross when calculating your overall income for the year).

If you're a higher rate tax payer, the rate is 32.5% but you still get the 10% tax credit making the rate 22.5% of the gross. Your dividend is still treated as being net of the 10% credit so the effective tax rate is 25% of the net amount.

The normal tax efficient approach is to take a minimal salary (enough to count as a qualifying year for NI purposes but not enough to incur any NIC payments), within your personal allowance, and take the rest of your remuneration as dividends from your leftover profit.

However, as you already have another job its likely that you have already used up your personal allowance. Any salary you paid yourself from your company will be taxed at basic rate at least, or whatever your marginal rate is.

There's no point in paying yourself salary just to avoid paying corporation tax as the basic rate of income tax is the same as the small companies rate of CT so they cancel eachother out *and* you'd have NIC to pay on top of this. Therefore you're going to pay corporation tax on your profits whatever happens (unless you stuff it all in to a pension).

It would be far better to either leave the retained profit in the company and let it build up. You can draw dividends as and when you need to, either up to the higher rate threshold to avoid paying any additional tax, or above it and take the higher rate tax hit if you do need the money. If you don't need it, leaving it in the company until you do makes sense.

Its worth remembering that if and when you close your company down, assuming you're eligible for entrepreneurs relief, you should be able to extract any retained profit in the company as a capital distribution which would be liable to CGT at the rate of 10% instead of income tax.

So to summarise, my completely unqualified opinion is:

* As you already have a day job, I wouldn't bother taking a salary. This also avoids the need to operate payroll and RTI.

* If you're earning under the higher rate threshold, I would take enough dividends to take you at least up to the higher rate threshold as its effectively tax free at that point (you've already paid CT though remember).

* If you're earning over the higher rate threshold, then consider leaving the profit in the company if you can afford to do so. Having healthy reserves is a good thing and has tax benefits when you shut the company down.

* If it makes sense for your situation (you really need to talk to an accountant and IFA about this), consider having YourCo make pension contributions. This will reduce your corporation tax bill in the short term although you're effectively locking the money away until you're 55.

HTH.

TheCyclingProgrammer

Oh, one last thing. If you do decide to take dividends over the higher rate threshold, you'll obviously need to put aside 25% of everything you take over the threshold for tax. You'll declare this on your self-assessment and you may have to make payments on account.

steeeb

An accountant isn't very expensive and will almost certainly pay for themselves by doing all of this for you.

zygurat789

cjcjcj wrote: »

However, if the money is retained in the business at the end of the year then the corporation tax is 20%. If I then pay myself some of this in the next year then I'm taxed again at 20%?

Should I not make sure I pay myself all retained profits before the end of the year, consequently paying zero corporation tax, but income tax instead as a one-off?

If you could quantify the amount exactly then you would indeed pay no CT at 20%. You would pay Income tax at 20% (presumably) national incsutrance at 12% and the company would pay national insurance of 13.8%. So you would end up paying a one-off 45.8%, by all means go ahead it will help reduce my tax bill.

purdyoaten

zygurat789 wrote: »

If you could quantify the amount exactly then you would indeed pay no CT at 20%. You would pay Income tax at 20% (presumably) national incsutrance at 12% and the company would pay national insurance of 13.8%. So you would end up paying a one-off 45.8%, by all means go ahead it will help reduce my tax bill.

Plus the grossing up - I think that the op is looking to have £20k net which converts to errrr!.......a lot more than £20k.

zygurat789

purdyoaten wrote: »

Plus the grossing up - I think that the op is looking to have £20k net which converts to errrr!.......a lot more than £20k.

If the CT taxable is £20K then

PAYE 20% on £17575 = £3,515
NI 12% on £17575 = £2,109
NET after PAYE & NI = £11,951
Ers NIC 13.8% on 17575 = £ 2,425

TOTAL £20,000 charge to P & L
NET to OP £11951
To HMRC PAYE £3515+EES NIC £2109 + ers nic £2425 = £8049