Moving from sole trader to ltd company?

thenewbee

Hi all

I started my business in August last year - I'm a dog walker and business has gone from strength to strength. Due to the nature of the work I have few expenses, and turnover is currently approximately £2,000 per month but will increase to about £3,000 per month in the next 6 months as my employee takes on more work.

I'm looking into forming a ltd company to reduce the tax and NI payments I have to make - however wanted to ask how this would practically change the way I operate.

Currently because I'm a sole trader I have been using a personal bank account (not my main one, but a separate one with mostly business things coming out). I pay my employee by bank transfer at the end of each month and get a mix of cash, cheque and bank transfer payments from my customers. Currently I'm just withdrawing from that account into my joint account with my partner and using it for bills, life in general!

If I were to form a ltd company I would set up a business bank account and pay myself a salary capped at the NI threshold, then take the rest in dividends. How would this actually work though? I would obviously pay a bank transfer to my own account each month through payroll, but when it comes to dividends how does that work? Is there a process to follow or do I just withdraw as and when? Does it have to be monthly, six monthly, yearly etc?

Just trying to get my head around the practical implications and would really appreciate advice on the things that will have to change.

Thank you

phill99

Don't over analyse things. Your accountantant will class any drawings (ie the money you transfer from your busness account to your personal account) as 'directors loan'. This all then gets finalised at the nd if the year when it will be classed as salary or dividends. If you don't have an accountnat, you will now need one.

thenewbee

I've had quotes from accountants for filing my annual return & doing accounts - which is what I envisage doing. But the ones offering more hand holding cost about 3 times that amount and I'm not happy paying that when I can get my head around this stuff myself.

Pennywise

thenewbee wrote: »

If I were to form a ltd company I would set up a business bank account and pay myself a salary capped at the NI threshold, then take the rest in dividends. How would this actually work though? I would obviously pay a bank transfer to my own account each month through payroll, but when it comes to dividends how does that work? Is there a process to follow or do I just withdraw as and when? Does it have to be monthly, six monthly, yearly etc?

Yes, you can pay your wages monthly, but remember that you also need to send an RTI submission to HMRC BEFORE each monthly pay day.

Dividends are best quarterly or less frequently. Yes, there are processes. To start with, you need management accounts showing that you have adequate post tax profits to cover the proposed dividend. Then you need a directors meeting minute to confirm and approve the dividend. Then you need a dividend certificate to evidence the dividend. Then you can pay it to yourself. Of course, lots of people don't do this and hope for the best, but it is the strict procedure to avoid problems with HMRC. Paying a dividend that isn't covered by post tax profits or paying lump sums that aren't covered by the supporting paperwork, or paying dividends too often (or even worse in the same transfer as your wages), are just invitations to HMRC to challenge the nature of the dividends - they love to try to change their nature so that they're either directors loans or payroll so they can issue bills for extra tax/nic and penalties. Easy enough to set up the procedure and follow it to avoid any potential problems with HMRC.

pleasedelete

Have you modelled it out? you are below the VAT thresholds and a basic rate tax payer. The benefits from a ltd may be limited. The small business NI tax break is time limited but as you will have 2 employees you wills save a bit at the moment. You will need to do a payroll of some kind but I assume you do that anyway with an employee.

If you have an employee you have a big expense- their wages. What is the profit after the expenses?

Do you take home £2k a month or less?

If the directors loan exceeds £10k (used to be £5K) then there may be different liabilities- so the advice above to do it all as a directors loan may not be helpful

Aquamania

thenewbee wrote: »

Hi all

I started my business in August last year - I'm a dog walker and business has gone from strength to strength. Due to the nature of the work I have few expenses, and turnover is currently approximately £2,000 per month but will increase to about £3,000 per month in the next 6 months as my employee takes on more work.

I'm looking into forming a ltd company to reduce the tax and NI payments I have to make - however wanted to ask how this would practically change the way I operate.

Currently because I'm a sole trader I have been using a personal bank account (not my main one, but a separate one with mostly business things coming out). I pay my employee by bank transfer at the end of each month and get a mix of cash, cheque and bank transfer payments from my customers. Currently I'm just withdrawing from that account into my joint account with my partner and using it for bills, life in general!

If I were to form a ltd company I would set up a business bank account and pay myself a salary capped at the NI threshold, then take the rest in dividends. How would this actually work though? I would obviously pay a bank transfer to my own account each month through payroll, but when it comes to dividends how does that work? Is there a process to follow or do I just withdraw as and when? Does it have to be monthly, six monthly, yearly etc?

Just trying to get my head around the practical implications and would really appreciate advice on the things that will have to change.

Thank you

The process is that the company decides to pay it's shareholders a dividend. This can be any amount of interim dividends (paid during the year), and/or a final dividend (paid at year end when the accounts are all worked out).

As long as you are the sole director and the sole shareholder of the company, it in effect means you can take the money whenever you want.

(Pay is paid through the PAYE system which you are presumably already familiar with as you already have an employee. As a director, you become an employee of the company)

pleasedelete

Just a note. You will need to change all of the insurance and liability insurances into the company name.