SB: New to Limited company, looking for a few tips.

gingermagic

Hello,

My girlfriend and I have set up a small limited company and would like some advice on how to best set up our finances in our situation. Here are the main things we would like some feedback on:

1) Pensions
Neither of us have pensions at the moment, but we have been keeping back £400 per month in our business account to put into whatever pension setup we go for. Can anyone advise possible ways to use this money? Am I correct in thinking that as soon as the money leaves the business, then we have to pay tax on it? So would it be better to leave the money in the business account rather than taking it out (and paying tax on it) in order to put it into a pension scheme? Can we set up something like a company pension scheme which would leave the money in the business somehow but still act as a pension for us? Should we put the money into property owned by the business or something to use as a kind of future pension? I really don't know what sort of options we're looking at so your thoughts would be much appreciated.

2) Savings (to spend)
This relates to point 1 in a way. Should we save money inside the business account or take is out to save? We could take money out to put into ISA's, but is that silly if it means that we pay tax on the money when it comes out? On the other hand, it has to come out at some point if it's our money so I guess that means the tax will always be paid on it at some point. Can you use ISA's within a business? By savings in this question, I'm referring to things like saving for holidays etc.

3) Savings (to save)
Maybe this is the same a question 1, but should any non pension long term savings be kept within the business or personally?

4) Investments
Again, related to question 1. If we decided to invest in something. Should/could we do that from within the business, or should we take money out of the business to invest in personally?

5) Free banking?
Our free period of banking with the TSB has come to an end. Is there a free alternative?

We should have sorted some of these things out a while ago, but we've just had a new baby and things have been a bit frantic with 3 kids running around the place :-)

Hope I'm posing this in the right place. Please let me know if I'm not and where else I could go for more answers. I've been meaning to write to this forum for a long time and have just been too busy. Really looking forward to reading any feedback.
Best wishes
Damian
www.gingermagic.com

Pennywise

OK, quite a few points.

Firstly, pensions, you should consider the company setting up a self administered pension scheme, where basically, you (as directors) keep control of where the money is invested, - you would have a choice of shares or other investments, and when it got enough money, it could buy commercial premises for your business or to rent out. You need to discuss this with an IFA who specialises in self administered schemes.

Secondly, you should be paying yourself a wage out of the company of at least the personal allowance, i.e. £5225 per year - this saves £1,000 in tax as the company gets tax relief on the wage and personally you pay no tax nor NIC as it is just below the threshold, yet you accrue "credits" towards state benefits. (You need to do the proper PAYE paperwork, annual returns etc for this).

Thirdly, payment of dividends doesn't affect the company's corporation tax, and you pay no additional tax on receipt of dividends until they push you into higher rate tax. So you need to work out and pay the maximum dividend possible up to the personal H/R tax thresholds.

So, say the company makes £80k per year profit. You pay yourselves £5k wages each, leaving £70k subject to corporation tax at 20% which is £14k. That leaves £56k to pay yourselves in dividends, i.e. £28k each. Personally, you have no more personal tax, so you both get £33k each out of the company, and the company has only paid £14k tax.

If the company pays into a pension, obviously its profits are reduced, as are its corporation tax bills.

Like I say, payment of dividends doesn't affect the company tax bill, so you are daft not to take as much as you can, until you hit the personal H/R tax band.

adypem

Regarding the setting up of your small Ltd company with your partner, be careful.
The HMRC have just lost a case about husband/wife companies where only one was earning and the other partner was used for salary/dividend shifting.
Regarding your share allocation for the company, if you are the main earner from the company then I would be inclined to hold the most shares. I currently hold 100% of the shares in my company.
If you see this being a long term situation with g/f working then a 75/25 split would be good.

In answer to your questions below :
1) Pensions - I can't really comment.

2) Saving (to spend) - Remember whatever you take out of a Ltd has to be accounted for, so its either salary/dividends/expenses/directors loan. The rest isn't your money its the companies.

3) Savings (to save) - Try and build up a rainy day fund in the company account for periods when you aren't working. Keeping it in the accout will earn interest although taxable.

4) Investments - Can't really comment on this, and would be interested in other views.

5) Free Banking - I have 2 years free banking with Alliance and Leicester, all online and easy to use.

There is a mind shift change needed when you start to run your own company. Although you have earned the money it isn't really yours its the companies. It would also be wise to source a good accountant/tax advisor.

Hope this helps and good luck.

Treading_Water

Co op offer free business banking for life - obviously subject to staying in credit - and with a cash limit - through the Federation of Small Business.

olly300

Depending on what sort of business you are in you will find that some banks will offer free business banking for life if you do your entire account online or free banking if you stay within the specified limits of writing cheques, paying in cheques etc.

Some banks will also allow you to set up a company saving's account linked to the company current account. I would investigate your options before opening a business account. (I'm with HSBC and have an online account. It took me one visit into the branch with the paperwork to set up a new account.)

I would also advise you to get yourself an accountant who deals with other small companies in similar businesses as yours until you are familar enough with the law to see what you can and can't claim. It's up to you whether you feel that you need to see your accountant in person or communicate just via telephone, email, etc.

orangetdavis

I'd hold off using Co-op bank. Despite their ethical credentials and friendly staff (based in and around Manchester), their internet banking is a total waste of time - it's often down, especially on Monday mornings when you most want it. Ironic considering that their internet banking brand, Smile, have excellent internet banking which works much better than their premium "business" banking.

Debt_Free_Chick

Gingermagic

I think the first thing you need to get straight is the difference between your personal money and the Company's money.

Don't make the mistake, for example, of thinking that any money which the Company puts into a savings account is yours. The Company is a separate legal entity so you need to separate your thinking.

Pensions

Am I correct in thinking that as soon as the money leaves the business, then we have to pay tax on it?

Erm, no. You only pay tax, as individuals, on any money or benefits you receive as individuals i.e. salary and any taxable "benefits in kind" e.g. if the company provides a car, for which you have personal use.

So would it be better to leave the money in the business account rather than taking it out (and paying tax on it) in order to put it into a pension scheme?

The Company can make a contribution to your pension plan (or to a company pension plan) and not pay any tax on it. Indeed, the company can claim an tax allowable deduction for the payment it makes to your pension plan (or to a company pension plan). In addition, payments made by the company to a pension plan for employees are not counted as a benefit in kind, so the employee (you) doesn't pay income tax on it either. It's a completely tax-free contribution.

Can we set up something like a company pension scheme which would leave the money in the business somehow but still act as a pension for us?

Why would you want to do this? The point of a pension is to save so that it provides you with an income in retirement. Probably better for your retirement if the money were invested outside the company. If the company goes belly-up, at least your pension is "safe".

There is no need to have a company pension, though. You can have a personal pension plan to which the company simply pays a contribution and it still counts as a tax-allowable deduction.

Should we put the money into property owned by the business or something to use as a kind of future pension? I really don't know what sort of options we're looking at so your thoughts would be much appreciated.

It is possible to own property via a pension plan - but the company wouldn't own it, the pension plan would. I think you really need to get professional advice on this, but as I said earlier, you need to separate what belongs to the company and what belongs to you ..... or what belongs to the pension plan. Keep it all separate and the situation becomes clearer.

Savings

This relates to point 1 in a way. Should we save money inside the business account or take is out to save?

Money that stays in the business account belongs to the Company, so it won't be yours to spend.

We could take money out to put into ISA's, but is that silly if it means that we pay tax on the money when it comes out? On the other hand, it has to come out at some point if it's our money so I guess that means the tax will always be paid on it at some point.

Correct. If you want money to save, then it has to pass from the company to you, so there are tax consequences.

Can you use ISA's within a business? By savings in this question, I'm referring to things like saving for holidays etc.

Company's can't have ISAs. But if you want the money for personal spending, then it has to be paid from the company to you and you'll pay tax (whether it's paid as salary, bonus or dividend).

Keep it separate in mind. It's either the company's money or it's yours. In order for it to be yours, the company needs to make a payment to you - as above, as salary, bonus or dividend.

Once it's yours, you can do with it as you like. If it's the company's money, then you can't spend or save it as you would wish.

HTH

Epiphone

1 - 4 see our accountant. They're worth their weight in gold.

5 - Abbey.

mbyrne01

Just remember a few things though - the Revenue believes that there is no such thing as free money.

If you pay yourself a salery, you have to pay yourself minimum wage, which will push you out of the tax free band into paying 10 and then 22% tax.

Secondly, the revenue is vey much opposed to people just shunting money from the company into a pension and there is a loophole that this needs to be 'consistant' with salery - much discussion about this but much more than 20% of salery as pension contributions and red flags get raised and your chances of a tax audit start to rise.

Have you had a look at www.taxcafe.co.uk - they do some very simply books that are well worth a read - and you can put them against the business and hence reduce your tax liability - could mean up to 40% off!

Good luck - stay with it,

Michael.

fguk

If you pay yourself a salery, you have to pay yourself minimum wage, which will push you out of the tax free band into paying 10 and then 22% tax.

As I understand it

If they are both directors of the company then NMW only needs paying if there is some sort of letter or contract of employment between the company and them. This letter/contract would make them a "worker" in the eyes of the Revenue, and the NMW would apply.

Most directors of SB's have no contract with their own company as they own it, not the other way round (as many employees may feel!!).

cledor

Pennywise wrote: »

OK, quite a few points.

Thirdly, payment of dividends doesn't affect the company's corporation tax, and you pay no additional tax on receipt of dividends until they push you into higher rate tax. So you need to work out and pay the maximum dividend possible up to the personal H/R tax thresholds.

Are you sure that dividends are not taxed, whenever I receive dividends they are automatically taxed at a basic rate of 10%