Limited Liability Company

deborah_mcdonald

Hi, I'm sure that this thread will come across as very naïve, but I could do with some advice.

I've always been a PAYE for various companies. In November I unexpectedly lost my job. I was a higher rate tax payer.

When I left my last job the company's IFA who I saw to find out about my pension mentioned that I if I was going to do freelance or temp jobs in the future then I should set myself up as a limited company.

I have been offered interim paid work at the HQ of a very small charity, which they've offered me for an initial 6 month period. It's possible that it may be extended if they get lottery funding, but they've failed to secure that in the past, so the duration of the charity work is questionable.

My question is should I set up a limited liability company and get the charity to pay the equivalent of my monthly 'salary' to that company rather than be a PAYE? I don't know much about it, but I know that IR35 seems to be mentioned in such circumstances? Does that mean that I will still have to pay NI and employee tax even if the money goes into the limited company?

Because I needed income, the charity role offered would be a 28% 'pay cut' compared to my last job. It also involves an 80 mile daily commute plus parking charges. I wouldn't yet get a pension from the charity, they don't offer healthcare or childcare vouchers, nor would I get much worker rights, so I don't think I'd be throwing much away by not being a PAYE employee.

So I was hoping that I could put mileage, parking costs, road tax and MOT, and perhaps even my lunch costs as limited liability company expenses? That would help offset some of the pay cut. Also I would pay 20% company tax, so if the work did extend for extra months that might be more financially advantageous for me than paying PAYE ?

The trouble is that because we're 3/4 of the way through the tax year I have already earned enough to keep me in the higher rate tax bracket for the first 3 months of the duration of the charity role. The last 3 months of the work would only take to a few hundred above the PAYE personal tax allowance. However if the charity work did get extended, annually the income would take me just a few hundred pounds into the higher rate tax payer zone.

I have a 2 year old daughter, so if the charity role does finish in the summer it would be nice to see if I can secure some freelancer work during the remainder of 2016 through a limited company, as my work-life balance isn't great right now. I do marketing and PR, so I'm in the type of sector where that may be possible.

What should I do about setting up a limited company? Should I wait and see how long the charity work is available for, and go PAYE in the meantime? Or should I set up a limited company now? Or is it really too much trouble to do a limited company regardless?

molerat

Working for the charity would, I think, be as an employee and thus PAYE so not really relevant to your setting up a limited co. I doubt they would sub contract that work to a third party (your company).

Darksparkle

The charity will need to consider your employment status. You can't choose what status you want to be, it's based on the terms of your engagement with them.

HMRC offer a tool to help with this - https://www.gov.uk/government/collections/employed-or-self-employed

Just to add, as well as the company paying any relevant corporation tax, any money you take out the company would be subject to tax/NIC depending on whether you take it as a salary or dividend or mixture of the two.

The company may also have NIC to pay on any salary paid to you depending on the amount.

There may also be a benefit in kind if the company pays any of you private bills eg your road tax and MOT, lunches.

What you'd basically need to keep in mind is that if it's a ltd company, it's the company's money, not yours. It's not the same as being a sole trader.

kidmugsy

If the charity will play ball it could be worth your while phoning two or three accountants to see if they are organised to set up such a company for you: when you find such an accountant you'll probably find that its pretty cheap. Be sure to enquire how they recommend VAT be handled. It could be set up so that its first "financial year" is up to 18 months long.

Among the advantages would be that instead of taking salary or dividends from the company in tax year 15/16 you could take a director's loan instead, thus avoiding higher rate income tax. Then in 16/17 you'd draw (i) a modest salary (say £670 per month), chosen so that you qualify for various State Benefits, without having to pay much in the way of National Insurance contributions (you'd pay none, the company would pay some tiny amount), and (ii) dividends, which are paid free of tax, though you'd eventually have some modest income tax to pay. You'd also want eventually to repay the director's loan.

The accountants would make sure the company held back enough money to pay Corporation Tax when it is demanded.

It would be for you to weigh up the pros and cons. As well as paying the accountants, the "contractor" route means that you'll get no holiday pay, no sick pay, no maternity leave, no pension contributions, and on, and on. But you'd expect to pay less in tax and NICs.

kidmugsy

P.S. if that's your real name I suggest you get out of the habit of using it in future.

Pennywise

kidmugsy wrote: »

and (ii) dividends, which are paid free of tax, though you'd eventually have some modest income tax to pay.

From April, personal income tax on dividends is 7.5% at basic rate or 32.5% at higher rate so it's not really "modest" income tax. Add that to the company's 20% corporation tax, and you start to see the true combined tax liability.

As for claiming travel costs, etc., that's a very complicated matter depending upon travel patterns, where your "base" is, length of time working at each other location etc. If you only ever do work for this particular charity, i.e. start co, work there, and ultimately stop working there and close down company, then probably no travel expenses claimable.

You need to talk to 2/3 qualified accountants and ask about your options - if they don't sound to know what they're talking about, walk away - some accountants specialise on contractors and are worth their weight in gold, others havn't a clue about personal service companies and can do more harm than good. It's up to you to choose wisely!

TheCyclingProgrammer

Darksparkle wrote: »

The charity will need to consider your employment status. You can't choose what status you want to be, it's based on the terms of your engagement with them.

Unless they are willing to engage OP as a Ltd company, in which case the responsibility for determining status passes to OP (IR35).

Just to add, as well as the company paying any relevant corporation tax, any money you take out the company would be subject to tax/NIC depending on whether you take it as a salary or dividend or mixture of the two.

The company may also have NIC to pay on any salary paid to you depending on the amount.

If OP goes the Ltd route and determines she is caught by IR35, then she can pay all the money her company turnover to themselves via PAYE, which would reduce the company profit to zero so there would be no corporation tax to pay, just income tax and NIC (of course OP would have to pay the employers NIC too). I've never operated under IR35 but IIRC there is a 5% expenses allowance although I'm not sure how this is affected by the changes to travel and subsistence expenses from April for those caught by IR35 (i.e. you cannot claim them).

If OP goes down the Ltd route then they need to do some serious research into IR35 and whether or not their engagement would be caught. If they can arrange their contract AND working practices so as not to be caught by IR35 then the Ltd route could still be very tax efficient because they could take out the bare minimum they need to live on for the remainder of this tax year as dividends (no salary, and thus minimise the amount of additional higher rate tax they pay) and leave any excess profit in the company (which should build up a nice buffer for them) and then take the basic salary + dividends up to higher rate approach from April (assuming this is enough for them to live on).

The new dividend tax from April does make the typical £10k salary + dividends up to the higher rate arrangement about £2k worse off but still better off than the equivalent on PAYE (mainly saving on the NIC) but expenses might be more flexible. More importantly you have the flexibility of leaving profits to accumulate in the company rather than having to pay the lot via PAYE and pay higher rate tax when you don't necessarily need to

Of course, if you can genuinely show there is a B2B relationship rather than an employer/employee relationship (the HMRC employment status indicator tests might help here) then Ltd isn't the only option, you could register as self employed if you want to keep things simpler but a) this doesn't offer nearly as much flexibility WRT dividend payments and leaving excess profits in the business and b) the client carries the risk of any HMRC investigation into employment status so may not be willing to engage OP this way anyway.

TheCyclingProgrammer

kidmugsy wrote: »

Among the advantages would be that instead of taking salary or dividends from the company in tax year 15/16 you could take a director's loan instead, thus avoiding higher rate income tax. ...SNIP... You'd also want eventually to repay the director's loan.

A directors loan could potentially be a way of avoiding paying more higher rate tax in this year and deferring the liability until the new tax year but IMO anybody who is just starting up their own Ltd company should be very careful with directors loans and needs to be aware of the rules around them (particularly the BIK/interest rule for loan balances over £10k and the need to repay them within 9 months of the company year end to avoid a corporation tax charge).

Of course, in the new tax year you will need to repay the loan (normally by declaring a dividend) but if you need the full amount of salary + dividend up to the higher rate just to live on then you might end up paying higher rate tax anyway, so the director's loan is just kicking the can up the road.

kidmugsy

Pennywise wrote: »

From April, personal income tax on dividends is 7.5% at basic rate or 32.5% at higher rate so it's not really "modest" income tax

Come now, 7.5% is modest. There's no sign (she tells us little) that in a few months of contracting in 16/17 she's going to reach the higher rate tax band. So she's looking at her dividends paying 0% on the first £8k and 7.5% on the rest, unless she did reach the higher rate threshold at £43k.

If she gets a well-paid job thereafter then there will be more tax to pay but until or unless that happens I'm guessing that with (about) four months work she's unlikely to be exposed to that 32.5%. Anyway, if she does find a new well-paid job she can always avoid some 32.5% income tax (and 20% Corporation Tax) by having her company make a pension contribution for her.

polymaff

Pennywise wrote: »

From April, personal income tax on dividends is 7.5% at basic rate or 32.5% at higher rate ....

AIUI, from 6th April 2016 the first £5,000 of dividend income is taxed at 0% irrespective of the tax-payer's marginal rate.

kidmugsy

polymaff wrote: »

AIUI, from 6th April 2016 the first £5,000 of dividend income is taxed at 0% irrespective of the tax-payer's marginal rate.

Yes, but it still counts as part of your income so it can force some other part of your income into a higher rate band. In other words "allowance" isn't really an accurate title for it: it behaves differently from the familiar Personal Allowance.