Making six figures profit as a sole trader

9to5nomore

My business is making more than I ever imagined.

But if this carries on I'm going to have a huge tax bill.

The savings seem to be small forming a limited company then taking out money as dividends after paying myself a wage to avoid income tax and paying out employers NI.

Is there a way to keep money in the company and just take out 20k ish a year?

I don't know how long the buisness will be profitable for or how long I want to keep doing it so would rather keep money in the company account and pay myself a small amount each year. Is this against the law? Or is there a better way to reduce my tax bill?

Pennywise

A big benefit of the limited company option is that profits left in the company are only taxed at 19% corporation tax rate as opposed to the 42% tax paid on a sole trader profits, whether drawn or not.

It's where a business owner takes out all profits from a limited company where there's not that much difference compared with a sole trader these days.

So, if you don't need to draw out all profits and can keep a lot of profit in the company (just building up the bank balance), a limited company will save a lot of tax/nic short term. Obviously, there will come a time when you want your money out, but you can plan for that and maybe utilise entreprenneurs relief or drip feed it out as dividends over many years after early retirement (i.e. use it like a pension).

One important thing to note is that you'll be taxed as s/t until you form the limited company and transfer the business into it - it's not something you can back date, so if you want to do it, sooner rather than later is better. There are also issues, tax traps etc around transferring the business to a limited company. You'd be crazy to try it without a good accountant on board, but hopefully you already have one if you are earning so much.

csgohan4

you can also use money from the company to pay into a pension which is tax deductible for both the company and your own salary assuming you pay yourself enough

As above get a good accountant to show you the pros and cons in detail individualized for you

There have been alot of tax changes for ltd companies over the last 10 years, some good some bad, but the overall momentum seems to be to narrow the gap between a paye earner and a Ltd. So up to you to see if it is worth it in the long run.

If you squirrel enough away, you could use the company to buy a property to let out if you so wish as a long shot for investment. But that is another Pandora box being a LL.

9to5nomore

Thanks so much, that's what I was hoping for - paying 19% corp tax and leaving it in the bank to withdraw when I need it. The online calculators show very little difference in PAYE and limited company - but I assume that's' because in a limited they assume you take it all out each year.

I don't have an accountant, it's very quickly gone up from 20k a year profit to way more in the last 6 months. Before I was just using self assessment

Any good tips to find an accountant that's good? It looks like 100 a month is about average, my accounts are pretty simple

csgohan4

9to5nomore wrote: »

Thanks so much, that's what I was hoping for - paying 19% corp tax and leaving it in the bank to withdraw when I need it. The online calculators show very little difference in PAYE and limited company - but I assume that's' because in a limited they assume you take it all out each year.

I don't have an accountant, it's very quickly gone up from 20k a year profit to way more in the last 6 months. Before I was just using self assessment

Any good tips to find an accountant that's good? It looks like 100 a month is about average, my accounts are pretty simple

100 a month seems the going rate plus more for most under 80k, expect to pay more if your gross is over this.

But you get what you pay for generally.

I would go for word of mouth first and then local registered accountants in that order


BTW well done on having a good successful business, not always easy those first few years trading

9to5nomore

csgohan4 wrote: »

BTW well done on having a good successful business, not always easy those first few years trading

Ah thanks so much! It's taken 4 years to make a decent income and for the first 2 I didn't even make enough to pay any tax while I worked harder than ever living off savings. I've kinda shot myself in the foot as I didn't start up as a limited company from the start so could have saved some tax now I'm making decent money. But can't complain really!

Hopefully a couple more good years to build up cash in the business account, then I can stop working such long hours

haras_nosirrah

I would wait to see whether the next parliament is red or blue. Corbyn has plans that will make going limited a bad idea

Pennywise

9to5nomore wrote: »

Any good tips to find an accountant that's good? It looks like 100 a month is about average, my accounts are pretty simple

Just be aware that literally anyone can call themselves accountants and set up an accountancy practice. It's not a protected profession like solicitors/architects/surveyors etc. The main chartered bodies have registers of their regulated firms on their websites - search for ICAEW, ACCA, CIMA and CIOT which are the 4 main bodies in England & Wales. You have virtually no protection if you chose an unqualified/unregulated firm which may not have insurance and not be bound by professional ethics/regulations.

Personally, I think £100 is on the cheap side for a properly qualified/regulated firm for a business making over £100k in profit, but it will depend on quality of your records, complications, etc so possible if your business is simple.

9to5nomore

Pennywise wrote: »

Just be aware that literally anyone can call themselves accountants and set up an accountancy practice. It's not a protected profession like solicitors/architects/surveyors etc. The main chartered bodies have registers of their regulated firms on their websites - search for ICAEW, ACCA, CIMA and CIOT which are the 4 main bodies in England & Wales. You have virtually no protection if you chose an unqualified/unregulated firm which may not have insurance and not be bound by professional ethics/regulations.

Personally, I think £100 is on the cheap side for a properly qualified/regulated firm for a business making over £100k in profit, but it will depend on quality of your records, complications, etc so possible if your business is simple.

I ended up going with a company that a friend recomended, it has been going a long ttime and employs lots of people over 3 branches.

They are costing £120 a month, although my accouts are pretty simple (usually 3-5 payments a month received) and about 10-12 items of expense every month.

As the biz bank account will be in my business name they can't touch it can they?