Advice request: Starting limited company

[Aloreth]

But not good when even the Head of Student Loans, Ed Lester did exactly that via a limited company and saved himself £40k per annum from his tax bill

And they arent exactly loopholes. Its just the law. Could be changed easily. Just that nobody wants to.

There is no ambiguity, they are loopholes. As soon as a piece of tax legislation is put into place, people then figure out ways of picking holes in it and dodging paying taxes. Its just selfish. Not trying to claim that it will change any time soon, just think a shame.

 

[BF-Bert]

Construction is a very wide ranging industry so make sure you know the business inside out before venturing out on your own. You can get bitten very hard by the main players if you don't understand the contract you have taken.

 

[Greebo]

The directors of every company that I work for (all FTSE 100 companies) are paid through PAYE and incur hundreds of thousands of tax charge every year.

Im genuinely quite annoyed that you can think that paying your fair share of tax is nonsense. I know its just the internet and it doesn't matter but I struggle to comprehend thought process.

How do you know? And a lot of company directors get a big chunk of their "salary" as beneficial long term share deals etc.

ALso this was one FTSE 100 company who went a bit too far with their tax avoidance scheme for directors. In 3 years it saved £7m in NI and tax for its directors. http://www.accountingweb.co.uk/article/court-closes-investment-companys-tax-avoidance-scheme/549766

 

[alx]

To be fair you do need that extra rate as you will have to fund your 5.6 weeks holiday per year (or more) plus sickness. So you probably need at least 15% more as a contractor than a staff role as minimum. Throw in pension and redundancy and other rights and it soon increases.

My gf used to contract and earnt £90k per year compared to £56k when she was salaried in the same position. She used to pay an affective rate of tax around 10 or 11%.

I completely understand why you tend to get the extra rate .

I've surprised the effective tax rate is so low with corporation and dividend tax, or is that just personal tax?

 

[pepsilol]

I know this will be more tax efficient, but I'm not interested in every dodge in the book. I'm happy to pay what I should be paying.

Give it a year or two

I view it as stealing plain and simple, making use of tax loopholes and going against the spirit of the law to pay less tax.

edit - also its really only available to people that already earn significantly above the national average salary anyway, I cant imagine that many companies will be willing to let their staff earning £20k incorporate as a legal entity. Its just another way to make the middle class even richer.

Spirit of the law That's a good one, I am gonna use that in the future.

 

[Aloreth]

How do you know? And a lot of company directors get a big chunk of their "salary" as beneficial long term share deals etc.

ALso this was one FTSE 100 company who went a bit too far with their tax avoidance scheme for directors. In 3 years it saved £7m in NI and tax for its directors. http://www.accountingweb.co.uk/article/court-closes-investment-companys-tax-avoidance-scheme/549766

Most companies disclose directors remuneration under the combined code including disclosure on tax paid.

 

[D.P.]

To be fair you do need that extra rate as you will have to fund your 5.6 weeks holiday per year (or more) plus sickness. So you probably need at least 15% more as a contractor than a staff role as minimum. Throw in pension and redundancy and other rights and it soon increases.

My gf used to contract and earnt £90k per year compared to £56k when she was salaried in the same position. She used to pay an affective rate of tax around 10 or 11%.

people always miss these details. And the fact that if you can't find work you can go long periods without earning


Paid Holiday
paid vacation leave
Paid sick leave
Redundancy pay out
Pension
Pension matches
Annual/performance bonuses
Other perks like internet/phone/car/fuel/computer/gym paid for
health/vision/dental insurance benefits
Legal aid/insurance
other work benefits (subsidized cantine, free snacks/drinks, funtivities, company expenses).
No accounting costs

 

[Maccapacca]

A friend is managing to pay his kids £10 a week each to wash his car and hoover his office. I can't find anything to say this is bonafide.

 

[Greebo]

A friend is managing to pay his kids £10 a week each to wash his car and hoover his office. I can't find anything to say this is bonafide.

Probably acceptable. They are earning under the national limit and are minors.

My ethos is if in doubt lob it in and claim it

 

[Greebo]

I completely understand why you tend to get the extra rate .

I've surprised the effective tax rate is so low with corporation and dividend tax, or is that just personal tax?

Combination of things.

ALl the expenses she could claim which she wasn't legally entitled to when an employee (much more generous rules)

She was VAT registered and the HMRC have some great flat rate schemes where you can be 3-4% to the good compared to what you would pay if you pay if you worked out the input and output tax.

Company vehicle saved her a lot a money too plus office in the house etc. Generous capital allowances on stuff bought for the business.

And on and on you go. Before you know it you can turn a £90k "profit" into a £30k taxable profit.

 

[alx]

Combination of things.

ALl the expenses she could claim which she wasn't legally entitled to when an employee (much more generous rules)

She was VAT registered and the HMRC have some great flat rate schemes where you can be 3-4% to the good compared to what you would pay if you pay if you worked out the input and output tax.

Company vehicle saved her a lot a money too plus office in the house etc. Generous capital allowances on stuff bought for the business.

And on and on you go. Before you know it you can turn a £90k "profit" into a £30k taxable profit.

Ah fair enough . Most of these things I knew about but I guess when you put them all together it really adds up!

 

[Greebo]

Ah fair enough . Most of these things I knew about but I guess when you put them all together it really adds up!

Certainly does. She was legally making £3k to £5k a year from the HMRC VAT alone. Legally. They had a very genourous flat rate for her type of work with an extra 1% for first year.

She hardly had that many vatable expenses she could claim the input tax on but was allowed 11% of her sale figure as a flat rate

And made my life much easier doing her vat returns too

 

[SexyGreyFox]

I view it as stealing plain and simple, making use of tax loopholes and going against the spirit of the law to pay less tax.

Do you really believe this nonsense?
So basically your Accountant says that if you legally tick that box you will pay less tax but you will say that you're not ticking it because it is 'The Spirit Of The Law'?

 

[Django x2]

it will be far from tax efficient come April 2016

 

[Pudney]

Wish people would stop calling it "the HMRC".

Oh, to the person talking about loans instead of paying themselves, loans to participators or disguised remuneration rules should cover that.

 

[alx]

it will be far from tax efficient come April 2016

Guessing you're refering to the dividend tax changes? It's a potential game changer for some, although I've seen contradicting figures on how much it will increase tax bills. Bith quotes below are from the same article:

"Indeed, initial calculations indicate that, excluding salary and reliefs like lower corporation tax and a higher tax-free allowance, an extra £6,679 in tax will be due on a £50,000 dividend."

"He calculates that, when combined with the removal of the NIC Employment Allowance (EA), contractors will be £1,062 and £3,164 worse off, on a £50k and £150k dividend respectively."

Which one is right lol.

The more worrying issue looks like the consultation on Supervision, Direction and Control and the ability to get tax relief on expenses.

 

[john_s]

making use of tax loopholes and going against the spirit of the law to pay less tax.

The law is the law... loopholes and all. If they don't want people to use the loopholes, the Government simply has to pass legislation without loopholes.

If you are a director of a limited company, you have a legal obligation to maximise the returns to the shareholders of the company. Minimising the tax paid by the company is therefore a legal requirement.

 

[Greebo]

Worse off but still better than not having a limited company and doing it the dividend way.

As thre are more changes than just the rate of tax on the dividends (I think the first £5k is at the old normal rate and then a higher rate over that from memory) but then other changes relating to NIC etc, everybody will be different.

The only sure thing is that you will be paying more tax overall and your take home will be less.

Still worth doing? Yes. There is obviously a minimum income where this is worth setting up before the costs outweigh the tax savings and this is now a much bigger income. I would never suggest that somebody on say £30k income did it but i suspect all the people setting up limited companies in this way are on much more than that.

Basically to roughly work out how much worse off you will be

(Dividend - £5,000) * 7.5% + £2,000 (if you claimed the NIC EA which everybody should have been

So a dividend of £50k incurs £3,375 of extra tax plus £2k more due to the NIC EA so £5,375 in total.

It doesn't quite work out like this as there is the increase in personal allowances so you will be adjusting the dividend payment down by the same amount to get the same total "wage" plus corporation tax decreases by 1% each year.

The big thing is whether NIC EA will be removed from limited companies where thw only other employe/director is the wife/husband. This has not been clarified yet by HMRC.

 

[spudbynight]

I would honestly avoid doing it yourself. Use an accountant/tax advisor. Go for one that uses software like FreeAgent or Clearbooks as it is great and gives you much more control. Prices are around £85 - £95 a month.

If you do it yourself, you will miss something. You need to complete VAT, Payroll, pension, self assessment, corporate tax, annual stats, etc. Too many rules to keep track of yourself.

And when you do miss this these things, HMRC hit with penalties. They penalise by the month and don't always chase you straight away. I know people who forgot to file a return and got a reminder 6 months later with notice of 6 months worth of fines.

 

[Greebo]

The law is the law... loopholes and all. If they don't want people to use the loopholes, the Government simply has to pass legislation without loopholes.

If you are a director of a limited company, you have a legal obligation to maximise the returns to the shareholders of the company. Minimising the tax paid by the company is therefore a legal requirement.

I would agree. Minimising the tax paid by the company is okay but perhaps minimising the tax paid by the shareholder is perhaps stretching this a bit too far?

Of course gets muddy when the company and the shareholder are effectively the same entity.