Potential Second Income but don't need the money now - Sole Trader or Limited Company? 14 February at 10:52AM edited 14 February at 10:55AM in Cutting tax 11 replies 200 views

vacheron

Hi Everyone. 

I'm after a little advice on the best way to approach being paid for some second income possibilities which have just come my way.

I currently work full time and use salary sacrifice to keep my earnings under the 40% threshold and obviosuly pay NIC through my current employment.

I have been offered the opportunity to do some consultancy work, but I am almost doing this as a favor to help out a friend and don't really need the extra income for anything. The total annual amount would exceed the £1K trading allowance, and I don't know how much work I may be asked to do over the coming months but it will not exceed the £85K threshold i've read requires you to register for VAT as a company... for one because I'm just not willing to do this much work in my spare time! 

I will be invoicing for my time at an hourly rate on an ad-hoc basis, so I guess a lot, if not all of this, would be considered "profit".
   

Friends who are self employed have all recommended that I should set myself up as a limited company, their reasoning being that I will be able to "Park" the money in the business, pay corporation tax, and then pay myself back slowly in years where it is more advantageous to do so (which the company can then apparently claim back as a loss?), in addition to being able to deduct certain tools (such as office equipment) which I may need to do my job.

However, reading the government online guides to self employment, they appear to be strongly suggesting that someone in my postion should go down the "sole trader" route, but it seems like this would simply appear as additional income which would be immediately taxed at 20% because of my other employment, and would very quickly push me back into the higher rate bracket which does not seem the best course of action to me as I don't need this money immediately (or even in the next few years).

Any advice or suggestions would be appreciated, I have not had to consider this before, so apologies if I have misunderstood some, or all of the above!

Jeremy535897

If you are married, your spouse is not using their basic rate band, and the business is not a risky one (getting sued if things go wrong), you could consider forming a husband and wife partnership. You can allocate profits as you choose.

Grumpy_chap

vacheron said:

Friends who are self employed have all recommended that I should set myself up as a limited company, their reasoning being that I will be able to "Park" the money in the business, pay corporation tax, and then pay myself back slowly in years where it is more advantageous to do so (which the company can then apparently claim back as a loss?), in addition to being able to deduct certain tools (such as office equipment) which I may need to do my job.

That's broadly true but only partly complete.
If you don't draw a salary this year, the money left in the business becomes "retained profits" and subject to corporation tax.
In future years, you could draw a salary, which would be a loss as described if there is no company revenue in those periods.
Another option is to draw dividends from the retained profits which are then taxed at the dividend rates (including a small amount at nil rate).

If you go sole trader, then the income will be profit in the year that the revenue is earned.

Jeremy has set out an alternative option.

How much do you think you might reasonably earn through this additional work?  Above £1k and less than £85k is a broad band.  
How many years do you think this additional work might be available over?
The answer to both of these questions will influence the level of reporting hassle that is warranted and whether there would be sufficient to justify an Accountant etc.

vacheron

Jeremy535897 said:

If you are married, your spouse is not using their basic rate band, and the business is not a risky one (getting sued if things go wrong), you could consider forming a husband and wife partnership. You can allocate profits as you choose.

Thanks, my wife is currently a 20% taxpayer, but that might be something I would have considered doing regardless, 

Jeremy535897

It is also worth mentioning that these arrangements may be within IR35.

vacheron

Grumpy_chap said:

vacheron said:

Friends who are self employed have all recommended that I should set myself up as a limited company, their reasoning being that I will be able to "Park" the money in the business, pay corporation tax, and then pay myself back slowly in years where it is more advantageous to do so (which the company can then apparently claim back as a loss?), in addition to being able to deduct certain tools (such as office equipment) which I may need to do my job.

That's broadly true but only partly complete.
If you don't draw a salary this year, the money left in the business becomes "retained profits" and subject to corporation tax.
In future years, you could draw a salary, which would be a loss as described if there is no company revenue in those periods.
Another option is to draw dividends from the retained profits which are then taxed at the dividend rates (including a small amount at nil rate).

If you go sole trader, then the income will be profit in the year that the revenue is earned.

Jeremy has set out an alternative option.

How much do you think you might reasonably earn through this additional work?  Above £1k and less than £85k is a broad band.  
How many years do you think this additional work might be available over?
The answer to both of these questions will influence the level of reporting hassle that is warranted and whether there would be sufficient to justify an Accountant etc.

Those last questions are very valid... and both tricky to answer.  

At the moment I am helping them get on their feet with certain tasks I have significant prior experience with, however there may be an ongoing element if this is an avenue they may ultimately pursue with more seriousness. Both these decisions are outside of my control though.

I could also use any resultant Limited Company for other third party work (which I have been approached by others to do in the past, but didn't take up at the time because of the perceived "fuss" of setting up an official way for them to pay me), so this could kill two birds with one stone. 

I would estimate if I took on all requests from all sources I might make between £10-£20K p.a. via this route (given the relatively small number of hours I would be prepared to undertake outside of my existing full time employment) and this could continue potentially for the next 6 years (when I hit my planned early retirement age) but possibly a small amount beyond that point to keep me busy.  

My thinking was to use the company retained profits you mentioned as a potential income supplement in the years between my retirement and before needing to draw down my private pensions a few years later? As our incomes could realistically be zero during those years this would leave my wife and I with potentially 2 sets of full personal allowance and some small nil rate dividend bands as you mentioned to use during these years as you suggested. 

I could also possibly put some of the retained profits directly into my pension (if this is permitted)? As I would not yet have drawn my pension at this point I would not have triggered the money purchase annual allowance reduction so would still have my full pension annual allowance available to me if this were somehow beneficial?

It sounds like the Ltd companty option making the most sense based on the above providing my understanding is correct? 

Jeremy535897

The limited company option may be the best bet if you are going to work for a few clients. I am assuming that IR35 is not an issue, but this needs to be checked:
https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

The company is likely to benefit from the future small company rate of corporation tax of 19%. It might be worth you starting a SIPP, which can take both personal and employer contributions (although subject to the £40,000 a year annual allowance between them). This gives you both flexibility in what the pension scheme invests in, and who invests in it (you or your company). The personal contributions are made with basic rate tax relief at source. The company contributions are paid gross but reduce (in normal circumstances) profits subject to corporation tax.

Grumpy_chap

vacheron said:

I could also possibly put some of the retained profits directly into my pension (if this is permitted)? 

Yes, except the Ltd Co can make the employer pension contributions from the pre-tax transactions (in the same way as if you drew salary).  That means no limit linked to annual earnings, but the annual allowance (£40k plus any carry-forward) will still apply.

From what you have said, it does not sound as though the work would be within IR-35, though Jeremy was spot-on to flag it as a factor to confirm.

It also sounds as though the enterprise will be large and durable enough to warrant the administration of Ltd Co. plus engaging the services of an Accountant.

vacheron

Thanks Jeremy535897, that is really useful information and the option of how to pay into the pension (company or personal) could also be interesting! 

I've had a quick look at the IR35 rules, and while I will certainly investigate this more thoroughly, it "appears" that the way I will be working for this initial client (working from home (while the rest of the company are office based) and providing specialist assistance, as and when required, but pretty much to my own deadlines and on my own terms) it sounds like it may not fall under IR35, but I have also read that the amount of new working from home employees has muddied these definitions somewhat!

vacheron

Grumpy_chap said:

vacheron said:

I could also possibly put some of the retained profits directly into my pension (if this is permitted)? 

Yes, except the Ltd Co can make the employer pension contributions from the pre-tax transactions (in the same way as if you drew salary).  That means no limit linked to annual earnings, but the annual allowance (£40k plus any carry-forward) will still apply.

From what you have said, it does not sound as though the work would be within IR-35, though Jeremy was spot-on to flag it as a factor to confirm.

It also sounds as though the enterprise will be large and durable enough to warrant the administration of Ltd Co. plus engaging the services of an Accountant.

That would be excellent if the company can pay pension contributions beyond the earnings limit as I may not need to drawing a salary from the company in these years! 

Yes, Jeremys comment was well worth investigating and I have learned a lot as a result of all the above feedback from everyone.
I have also read that there is a small companies excemption from IR35 which I also belive my client would fall under. 👍

Jeremy535897

The small company exemption only absolves the client from operating IR35, though, not you:
https://www.bdo.co.uk/en-gb/insights/tax/global-employer-services/off-payroll-rules-what-is-the-small-companies-exemption