Sole Trader or Ltd


A

Andy

I am a Sole Trader who does Home Improvements and have a Taxable Profit of
around £25,000 pa.
What are the advantages/disadvantages of becoming a Limited Company with my
wife as co-director?
Limited liability is one, but what I really want know is will I pay less tax
if I go down this route?
 
K

Keith

Andy <x@?.?.invalid> said:
I am a Sole Trader who does Home Improvements and have a Taxable Profit of
around £25,000 pa.
What are the advantages/disadvantages of becoming a Limited Company with my
wife as co-director?
Limited liability is one, but what I really want know is will I pay less tax
if I go down this route?
You can pay your wife a salary below the tax threshold - about GBP4,200.
Or pay her GBP6,200 and pay 10% tax on the additional 2 grand
 
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D

Dave

You can pay your wife a salary below the tax threshold - about GBP4,200.
Or pay her GBP6,200 and pay 10% tax on the additional 2 grand
Not if she's already working and using up some or all of her allowance.

Dave
--

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The internet is too big to fit in your recycle bin
Do you REALLY want to delete it?
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A

Andy

I am a Sole Trader who does Home Improvements and have a Taxable Profit
of
Not if she's already working and using up some or all of her allowance.

Dave
--
My wife is already working elsewhere and uses up her personal allowance
there.
Would I save tax if I became a Ltd Company and if so how much?
What are the advantages/disadvantages of doing this?

Andy
 
R

Ronald Raygun

Andy said:
My wife is already working elsewhere and uses up her personal allowance
there.
Would I save tax if I became a Ltd Company and if so how much?
What are the advantages/disadvantages of doing this?
Yes, you would save tax.

As a sole trader earning £25k, you would pay:

NI at 8% of £(25000-4615): £1630.80
Income tax at 0% of £4615, 10% of £1960, and 22% of £(25000-6575): £4053.50
Total: £5684.30.

As a company with £25k profits, *the company* would pay corporation tax
at 23.75% of £15k (the first £10k are tax free): £3562.50

The company then pays you a salary of £4615 (which is free of NI and tax,
assuming you have no other employment, but it still gives you the NI
benefits without paying for them), and you take the rest as dividends.
They are not subject to NI, and will not be taxable unless as a result
of other income you become a higher rate taxpayer.

So by incorporating you would save over £2100.

The disadvantage of incorporating is extra paperwork. But it's nothing
you (or the wife) can't handle.
 
A

Andy

So if by becoming Ltd it would save over £2100 in tax and national
insurance, how come everyone is not doing it? The only one I have heard of
is a mate of mine (he's self employed like me) whose accountant recommended
he do it.

Does it effect my pension contributions if my salary goes down to £4615 or
just above this and rest is classed as dividends? I alreasy contribute to a
private pension.

By not paying National Insurance contributions would this not mean I am not
entitled to benefits or a reduced state pension and would I only get reduced
benefits if I became sick?

Would I have trouble from Bank/Building Society in getting another mortgage?
We are thinking of moving house sometime in the next year or so.

As Ltd wouldn't I have to obtain employers liability insurance?

Sorry about this but I am simply not sure if becoming Ltd is all it is
cracked up to be!

Andy
 
D

David Floyd

Yes, you would save tax.

As a sole trader earning £25k, you would pay:

NI at 8% of £(25000-4615): £1630.80
Income tax at 0% of £4615, 10% of £1960, and 22% of £(25000-6575): £4053.50
Total: £5684.30.
Plus NI Class 2 = £104
As a company with £25k profits, *the company* would pay corporation tax
at 23.75% of £15k (the first £10k are tax free): £3562.50

The company then pays you a salary of £4615 (which is free of NI and tax,
assuming you have no other employment, but it still gives you the NI
benefits without paying for them), and you take the rest as dividends.
They are not subject to NI, and will not be taxable unless as a result
of other income you become a higher rate taxpayer.

So by incorporating you would save over £2100.
Plus NI Class 2 Saving = over £2200

DF
 
P

Peter Saxton

So if by becoming Ltd it would save over £2100 in tax and national
insurance, how come everyone is not doing it? The only one I have heard of
is a mate of mine (he's self employed like me) whose accountant recommended
he do it.
Because it is too much hassle and the rules can change.
Does it effect my pension contributions if my salary goes down to £4615 or
just above this and rest is classed as dividends? I alreasy contribute to a
private pension.
Yes.

By not paying National Insurance contributions would this not mean I am not
entitled to benefits or a reduced state pension and would I only get reduced
benefits if I became sick?
No

Would I have trouble from Bank/Building Society in getting another mortgage?
We are thinking of moving house sometime in the next year or so.
Your income should be the same. Dividends + salary = Self employed
profits
As Ltd wouldn't I have to obtain employers liability insurance?
I dont know but I wouldnt be surprised if you were exempt.
Sorry about this but I am simply not sure if becoming Ltd is all it is
cracked up to be!
You wont save 2,000 pounds. You may save a little. One of my clients
incorporated but he got into such a mess with money going into
different bank accounts and being paid out of different bank accounts
the accounting costs were much more than they should be. A lot of
people see the reduced tax but are not organised enough to do things
properly.



(e-mail address removed)
 
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T

Tim

Your income should be the same. Dividends + salary = Self employed
profits
Is this based on gross dividends (gross of 10% notional tax), or dividends
(as paid), or net dividends (net of any higher-rate tax)?
Similarly, gross or net salary - & self-employed-profits?
Is salary grossed-up for employers NI?
 
T

Tim

Andy said:
Would I have trouble from Bank/Building Society in getting another mortgage?
We are thinking of moving house sometime in the next year or so.
---------------------------------------------------------------------
"Peter Saxton" wrote
Net dividends
"Peter Saxton" wrote
Gross
"Peter Saxton" wrote
No
---------------------------------------------------------------------

So, we have: Self employed profits = Net dividends + Gross salary
(excluding any employers NI)
And you say that income will be the same whether paid out as salary or
dividends? Are you sure? I would have thought that your definition (above)
of 'self employed profits' could be maximised by adjusting the split between
dividends & salary?
For example:

Salaries:

If salary is below 4615, each extra £1 in the Ltd Co can be paid as £1 extra
gross salary which is not taxed so £1 is received net, extra. Your 'SEP'
(Self employed profit) definition is £1 here.
If salary is between 6575-30940, each extra £1.128 in the Ltd Co can be paid
as £1 extra gross salary which is taxed at 22% and NI is 11% so 67p is
received net, extra (so £1 gives 59.4p) - and 'SEP' is 88.65p per £1
revenue.
If salary is above 35115, each extra £1.128 in the Ltd Co can be paid as £1
extra gross salary which is taxed at 40% and NI is 1% so 59p is received net
(so £1 gives 52.3p).

Overall: an extra £1 in Ltd Co, paid out as salary, might provide (amongst
other figures for other bands) £1 (your 'SEP'=£1), 59.4p (your 'SEP'=88.65p)
or 52.3p (your 'SEP'=88.65p).

Now let's consider dividends:

If profits are below 10000, each extra £1 in the Ltd Co can be paid as £1
net dividend - not further taxed unless HRT, when 75p is effectively
received, extra.
If profits are between 10000-50000, each extra £1 in the Ltd Co can be paid
as 76.25p net dividend (after corporation tax) - not further taxed unless
HRT, when 57.2p is effectively received, extra.
If profits are between 50000-300000, each extra £1 in the Ltd Co can be paid
as 81p net dividend - not further taxed unless HRT, when 60.75p is
effectively received, extra.

Overall: an extra £1 in Ltd Co, paid out as dividend, might provide any of:
£1 (your 'SEP'=£1), 76.25p (your 'SEP'=76.25p) or 81p (your 'SEP'=81p) --
for 'non-HRT'; or, for HRT -- 75p (your 'SEP'=75p), 57.2p (your
'SEP'=57.2p) or 60.75p (your 'SEP'=60.75p).

Conclusion:

Looks like, unless the Ltd Co profits are below £10,000, then paying out
extra money as *salary* will certainly give a *higher* figure for your "Self
employed profits" (either 100% or 88.65% of extra revenue distributed -
compared to somewhere between 57.2% and 81% for dividends) - using your
definitions (as given). HOWEVER, paying out money this way may mean *less*
money, after tax, for the person to enjoy!! (eg 52.3p or 59.4p per £1
distributed, rather than eg 60.75p or 76.25p)

Any comments?
 
R

Ronald Raygun

Tim said:
Ah, but I don't think that I did misunderstand!

The OP is worried what "income" the Bank will consider. You specified
*gross* salary, but *net* dividend. Thus OP could MAKE THE FIGURE (which
the bank is going to look at) BIGGER, just by paying out of the Ltd Co as
*salary* rather than *dividends* (from my last post).

On the other hand, you could suggest that the bank will look at gross
salary
& *gross* dividends. In this case, it is probably the opposite -
dividends will be better than salary (due to employer's NIC).

Don't you agree?
Gross and net dividends are equal unless higher rate tax applies,
which for the OP, whose self employed profits are £25k, it doesn't.

If he incorporated, and his company gross profit were £25k, and if
he paid it all as salary, with no dividends, then his gross salary
would be 4615+(25k-4615)/1.128 = 22687.

If he paid it all as dividends, with no salary, his gross and net
dividends would be 10k+15k*(1-0.2375) = 21438. Some 5.5% less,
right enough.

If he did what is usually recommended, namely pay himself a 4615
salary and the rest as dividends, his income for mortgage purposes
would be 4615+10k+10385*(1-0.2375) = 22534 which (by coincidence)
is near enough the same as if it were all salary (the coincidence
being due to dividing by 1.128 being like taking away about 12%,
and corporation tax is taking away about 24%, and with the original
£25k input, it just so happens that we take away half as much of
about twice as much in one case (12% of about £20k) as in the other
(24% of about £10k)).

But the bottom line is still almost 10% less than when he was self
employed, when the whole £25k would have counted. So he is right
to worry.
 
P

Peter Saxton

Ah, but I don't think that I did misunderstand!

The OP is worried what "income" the Bank will consider. You specified
*gross* salary, but *net* dividend. Thus OP could MAKE THE FIGURE (which
the bank is going to look at) BIGGER, just by paying out of the Ltd Co as
*salary* rather than *dividends* (from my last post).

Point being that *salary* will (have been) better than *dividends*.
This means the bank should agree to a bigger mortgage than if they had paid
out of the Ltd Co as dividends.

HOWEVER, they'll actually be *worse off* !! (tax slightly higher if money
received as salary). This is a secondary point, but one which just goes to
show that getting the salary/dividend split "right" for the biggest mortgage
possible, will not necessarily mean it is the most tax-efficient.

On the other hand, you could suggest that the bank will look at gross salary
& *gross* dividends. In this case, it is probably the opposite - dividends
will be better than salary (due to employer's NIC).

Don't you agree?
I thought the discussion was between salary plus dividends versus self
employed profits. You seem to be comparing dividends against salary. I
realise everything is different but I thought the OP was questioning
whether to stay self employed or incorporate. We can still have a
different discussion about if you are incorporated and how should you
take money out if you want but people may give different emphasis to
their answers depending on the question. Just like it would be
different if pension arrangements were the priority.

I would think a mortgage applicant would gross up the dividends on the
form to show a greater income if that was important.

To be quite honest with the self employed profits we are talking about
- 25k - the mortage is not going to be very big anyway.


(e-mail address removed)
 
T

Troy Steadman

Peter Saxton said:
I thought the discussion was between salary plus dividends versus self
employed profits. You seem to be comparing dividends against salary. I
realise everything is different but I thought the OP was questioning
whether to stay self employed or incorporate. We can still have a
different discussion about if you are incorporated and how should you
take money out if you want but people may give different emphasis to
their answers depending on the question. Just like it would be
different if pension arrangements were the priority.

I would think a mortgage applicant would gross up the dividends on the
form to show a greater income if that was important.

To be quite honest with the self employed profits we are talking about
- 25k - the mortage is not going to be very big anyway.


(e-mail address removed)
uk.legal added.
 
T

Troy Steadman

Andy said:
I am a Sole Trader who does Home Improvements and have a Taxable Profit of
around £25,000 pa.
What are the advantages/disadvantages of becoming a Limited Company with my
wife as co-director?
Limited liability is one, but what I really want know is will I pay less tax
if I go down this route?
uk.legal added
 
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P

Peter Saxton

Funnily enough, I am in almost the same situation. Last financial year I
cleared a net profit of £33k as a sole trader and was fairly unimpressed
with my tax bill. Went to see an accountant and they estimated I would be
around £4-£5k better off if I incorporated, paid myseld a minimum salary and
took whopping dividends 4 times a year to supplement it.

..probably even better if I left the money in the business and invested it
in some other business related ventures?
I would say the saving is under 4,000 pounds. You then have to take
off accountancy fees. For statutory accounts, payroll and corporation
tax as well as personal tax I would say the charge could be around
1,000 pounds. Obviously this could vary greatly depending on the
record keeping and complexity of the tasks.

Personally, I would rather keep things simple and devote energy to
running a business than bother about 3,000 pounds a year.



(e-mail address removed)
 

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