Self- employed at Ltd Company- Advice Pls

skyjumper

i'm self-employed under the Ltd Company I had set up in Jan 2008. the plan was that I would go back into full time employment if this doesn't work out.
Luck has been good and i have been getting regular work. Planning to continue what i'm doing without having second thoughts about going backt to full time employment. i had a few questions

1. If I had started working as Self Employed in Jan 2008, when will my Tax dates be- both for self employed one and the one for the Ltd Company
I do have access to an account , but what she tells me is that I dont have to be bothered about any of these things until 2010 April -is this right, or am i missing something

2.i'm taking out around £ 1000 per month as salary and the plan is to take some profits as dividends. i will give an approx spreadsheet of the finances

this is for the last 6 months

total Income - 30,000
total expenditures- 9,000
Salary drawn- 6,000

Balance- 15,000

Pls advice on the amount I could take out as Dividend. I haven't taken out any dividends and i'm the only director of the Ltd Company.

Hope the Tax Guru's in here will be able to give some help with the figures.
Thanks in advance.

Pennywise

Firstly you AREN'T self employed. You are an employee of your own limited company. You would only be self employed if you were a sole trader or partnership.

You have to learn to separate the company from your personal affairs.

The company pays corporation tax on its profits. This is due 9 months after the end of the accounting year, presumably which will be 31/12/08 so your first company tax bill will be 1/10/09.

Your personal tax is dealt with under self assessment tax returns for each tax year, i.e. 6/4 to 5/4. Your first tax year was the year ended 5/4/08 and you will need to complete a self assessment tax return and pay any personal tax due by 31/1/09.

If you take a salary out of the company, it must go through the payroll and have tax/NIC deducted which is paid by the company to HMRC every month/3 months. A payment of a salary reduces the company profits, so the company pays less corporation tax. Presumably you have registered as an employer and have been doing proper payslips - there was the employers' annual return for the tax year ended 5/4/08 which should have been submitted in May together with the payment of the tax/NIC.

You can also take dividends out of the company's "after tax profits". The payment of dividends don't affect the company's tax bill. They need to be declared on your own personal SA tax return and you may personally have a tax liability if your total personal income goes into higher tax rates.

I would strongly suggest that you get yourself a decent accountant now before you go on too far, possibly doing things in the wrong way and costing you money. It sounds like your "accountant" is not really up to the job. You shouldn't be relying on friends/family, you need proper advice when running a limited company. It is very easy to start accumulating large fines and penalties for missing deadlines for Co House and HMRC. I see too many people who think they can do it themselves or think they can wait and only see an accountant a year after they started - it's too late by then and may have cost you a lot of money!

theculverhouses

Good advice from Pennywise. [EMAIL="I@m"]I@m[/EMAIL] an accountant and me and my colleagues see this on virtually a daily basis. Those which always work out better are those which have sought help early. Those which don't seek help ultimately pay more in either tax or our fees to sort them out.

Sully316

I agree with Pennywise & theculverhouses. You really need to speak to your accountant again, or get a new one, because you should not have paid yourself a salary between Jan 08 to 5th April 08, any monies you take should have been via a dividend. This is because you will have already made use of the majority of your personal allowance for the year via your salary from your previous employment before you set up as a Ltd company,a nd there would be tax/nic due on anything you take after this.

From 6th April 2008 onwards upto 5th April 2009 you need to be drawing a salary of £5,435 for the year, anything more than this will mean you are paying tax and national insurance contributions, as well as your Ltd Company as an employer also paying Employers NI. Have you set up a PAYE scheme with HM Revenue & Customs to run payroll ? If you have, please make sure you have submitted forms P35 fior the year ended 5th April 2008, which was due in May. Speak to your accountant, if you get billed for an hour or two going through just some of the above points, it will save you more in the long run. If you need any more help just let me know. Theres a hundred other questions your accountant needs to go through with you. i.e. Car travel, mileage claim backs etc. Good luck.

carl1981

Please don't take advice like this from a public forum - no-one on here knows your full circumstances. What I can say is that you evidently have not had any advice so far, and what is said above is broadly correct.

HOWEVER - please consult an accountant before acting on any of the above. For example, if you act on Sully316's advice, you will not be paying NI, and thus potentially will not make sufficient contribution for a state pension. Unless you qualify for HRP I would suggest you pay yourself a little more than the PA, to ensure that you make the regular stamp. There is also an online file incentive (tax free), although this may have passed now, I don't tend to get involved with this day to day.

But on the flip side, are you considered to be an IR35 service company (just going by your vague wording)? Opens up a whole new can of worms...

Take proper advice, not free snippets from a forum. Cheap accountancy advice is often the most expensive advice.

dosh

http://www.brookson.co.uk/

blackbooks

Pennywise wrote: »

You can also take dividends out of the company's "after tax profits". The payment of dividends don't affect the company's tax bill.

So if dividends come out of after tax profits, how is the tax on them calculated? I.e. you are taxed at 19% for corp tax, then on peronsel tax what do you have to pay? Is it just taxed at your stadard threshold rate (i.e. 20% if you earn less than 40K) thus 10,000 profit = 8,100 after corp tax and then 81 x 80% = 6400 after personal income tax as well?
Cheers

cash99

carl1981 wrote: »

Please don't take advice like this from a public forum - no-one on here knows your full circumstances. What I can say is that you evidently have not had any advice so far, and what is said above is broadly correct.

HOWEVER - please consult an accountant before acting on any of the above. For example, if you act on Sully316's advice, you will not be paying NI, and thus potentially will not make sufficient contribution for a state pension. Unless you qualify for HRP I would suggest you pay yourself a little more than the PA, to ensure that you make the regular stamp.

The first paragraph is good advice, use the information here so that you can have an informed discussion with a professional. The second paragraph is actually wrong and I guess proves the advice in the first.

If your salary is above the lower earnings limit in the year then the year will count towards your basic state pension. The lower earnings limit is below tax personal allowance, therefore a salary equal to the tax personal allowance is ok for basic state pension purposes, even though no NIC is paid. You will not get the state secondary pension on these earnings however.

olly300

blackbooks wrote: »

So if dividends come out of after tax profits, how is the tax on them calculated? I.e. you are taxed at 19% for corp tax, then on peronsel tax what do you have to pay? Is it just taxed at your stadard threshold rate (i.e. 20% if you earn less than 40K) thus 10,000 profit = 8,100 after corp tax and then 81 x 80% = 6400 after personal income tax as well?
Cheers

From your questions and knowledge of corporation tax PLEASE GO AND SEE AN ACCOUNTANT.

Once you have seen one you can come back here and ask questions but then you must always go back and check the various answers you have been given with your accountant. Your accountant is the one who helps you avoid being fined or investigated by HMRC. In addition they will be able to give you some tax planning advice.

While using an accountant does cost you money anything from about £65-100 per month a good one will save you money in terms of tax planning, paying HMRC fines and paying for HMRC investigations.

Magandang_Buhay

It's odd, isn't it, that the current rules allow one person to set up a Limited Company. Leading to the apparent loophole that someone can one day be employed or self employed, and next day set be paying less tax by laundering their earnings through Company dividends. However, Employment Status isn't a matter of choice but of fact. Hence IR35 and the need to take advice.

onetonman

Well I am a complete newbie here, and even though I agree with the other posters that you should definitely get an accountant in this situation, there is a lot of information you can get for free about your circumstances from government websites (www.direct.gov.uk and www.hrmc.gov.uk being two very helpful ones).

Basically, most directors pay themselves from their own limited company like this:

1) You become an employee of your own company and pay yourself the basic tax allowance for the tax year (6 April to 5 April) in wages. This should be done by an accountant as the company has to register for PAYE and National Insurance contributions, even though in this case none or very little will be paid. Therefore you receive this £5435 (2008-09 allowance) per annum tax and NI free.

2) Your limited company pays Corporation tax on all of your profits at the end of it's tax year. The first tax year of a company can be up to 18 months after it was incorporated and after that it has to be done every 12 months. If you have a 'small' company, the tax rate is currently 20% (and is rising 1% a year to 22%).

3) Once the company has paid it's corporation tax, the shareholders (usually you if you are the sole director) can receive dividends. Dividends payments and the tax involved are quite confusing, but (don't worry if you don't understand this next bit) basically you get a 10% tax relief on them because the tax has already been paid by the company. Confused? Most people are...! But what this means in real terms is: Your basic rate tax allowance (for 2008-09) is £34,600 and the 10% tax relief has to be taken into account on this, meaning you end up with an allowance of £31140. This is the amount of dividends you can take from the company without paying anymore tax yourself because the company has already paid the corporation tax and the HRMC are crediting you with this.

4) If you go over the £31140 basic rate allowance, you have to pay an additional 32.5% tax personally on the dividends. But again, the 10% relief kicks in which means you actually pay 22.5%

It all sounds really confusing at first, but a couple of examples could help:

Acme Limited makes £30,000 profit in its first year.
Acme Limited pays £6,000 (20%) in Corporation Tax.
Tom is the sole director and shareholder in Acme Limited.
Tom takes £5,435 in PAYE as an employee of the company and as it's his personal allowance, this is tax free and he pays no National Insurance either.
Tom then takes the remaining £24,565 in a dividend payment, and because this is under his £31,140 (£34600 with 10% relief) basic rate allowance, there is no more tax for him to pay.

Therefore Tom has effectively paid a tax rate of 20% to HMRC - which is better than someone on a normal totally PAYE salary at a company because they would also have had to pay 9% odd in National Insurance, making their tax rate ~29%.

Acme Limited makes £100,000 profit in its first year.
Acme Limited pays £20,000 (20%) in Corporation Tax.
Tom is the sole director and shareholder in Acme Limited.
Tom takes £5,435 in PAYE as an employee of the company and as it's his personal allowance, this is tax free and he pays no National Insurance either.
Tom then takes the remaining £74,565 in a dividend payment
The first £31,140 is within his basic rate allowance and there is no more tax for him to pay on this.
The remaining £43,425 taxable at the higher rate and he has to pay an additional tax of 22.5% on this, netting Tom £5,435+£31,140+£33,654.37.

So skyjumper, from what you said in your post, if you have been taking £1,000 a month from the limited company and not setup any PAYE scheme, whatever scenario you're in you could just treat the income as dividends and not personally pay any more tax whatsoever - all you would pay is the corporation tax bill for the limited company at 20% of it's profits. Most good accountants could back-date the dividend paperwork for you (if you're still in your first year of trading with the limited company) and allow for the fact you've been taking £1,000 a month instead of say £12,000 in one go at the end of the year.

You would still need to declare this income though to HMRC and you would need to do this through self-assessment.

Hopefully I made some things a bit clearer, but it's a very hard topic to write about! More information is here:

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/index.htm
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnSavingsAndInvestments/DG_4016453