Are you a growing start-up and wondering if it’s time to take the next step to set your thriving business up as a limited company, whilst being as tax efficient as possible?
There are many reasons why you may decide to set up as a limited company. If you are planning on growing your company or are growing rapidly and expect to continue to increase your revenue at a high turnover rate, it may be time to consider setting up your business is a limited company .
We walk through the tax considerations of making such a change below.
When you move to a limited company status, there are additional tax bills which you may not be aware of or currently pay, including:
- Value Added Tax or VAT
- Payroll taxes
- Corporation tax
- Personal income tax
This is a tax on your goods and services that you sell and that you collect on behalf of HMRC. As a limited company, whenever you send out an invoice for services rendered or goods sold you are required to add in a VAT line in the invoice, and ensure that when it comes to completing your company’s VAT return for HMRC, you pass on the correct amount of tax you have collected on your sales.
In reality, this VAT amount return is usually offset against any business purchases you make during the same period. For example, if you buy goods from a VAT registered supplier, you will pay the supplier the full amount due as per the VAT invoice they provide you, but you then claim back the VAT you have paid to the supplier in your VAT return.
Your VAT return therefore will include both sales and purchases with the VAT offset against each other, and so reducing the amount of VAT you are required to pay to HMRC.
It is worth noting that if you are on a Flat Rate Scheme, the amount of VAT you pay is calculated based on a percentage lower than the standard rate of 20%. The percentage is determined by the type of work you do and how much HMRC believe the purchase VAT comes to. This percentage is calculated on your gross sales and is used to reduce the administrative burden of calculating VAT on all your purchases.
You are required to complete a VAT return and pay any outstanding VAT quarterly, one month and seven days after the end of your VAT quarter. The exception to this is if you are on an annual accounting scheme which in his case, payments are still due in regular instalments but the VAT return is only due once a year.
As a director of your business, you are viewed as an employee of the company by HMRC. Employees get a salary and pay via PAYE and National Insurance (NI). It is therefore a good idea to pay yourself enough salary to cover your NI contribution to qualify for state benefits such as pension and maternity allowances. The minimum that you need to pay yourself to get this is £5,876. The optimal salary, to take into account your personal allowance, would be £8,164 which is before you start getting charged for the Employers NIC at 13.8% and employees NIC at 12%. A salary of £8,164 has the benefit of no tax or NI payments whilst giving a credit towards the state pension scheme – one of the very few tax free benefits which have not been taken away. The maximum state pension is £8,547 vs .£6,550 the basic state pension. 30 years of state pension credit is required to reach maximum. These figures are correct for the current tax year 2017/2018.
You are due corporation tax on any profit you make. In simple terms, your profit is the final amount you are left with once you have worked out all your sales for the year/period less allowable business expenses for the year/period. The Corporation Tax (CT) due is calculated on this profit amount. Any profit left over after paying CT which you want to take out of the business, as a salary for example, can be taken as a dividend.
It is important to note that dividends cannot be taken retrospectively, so it is imperative to have up to date management accounts to ensure the correct dividends are taken. Likewise, having up-to-date management accounts means you and your accountant are able to work out how much tax can be saved on your corporation tax bill.
Dividends are subject to tax too, but currently the first £5,000 of dividends are not taxed, after that, thereafter it is taxed at 7.5% for basic rate taxpayers and then at 32.5% for higher rate taxpayers. There is also an additional rate at 38.1% for dividends above £150,000.
4.Personal income tax
If you do decide to move to a limited company, you as a director are still expected to complete your personal income tax return, which is separate from your company taxes and due by the end of January. If you have Payment On Account (POA), this is due on the 31st January and 31st July every year. POA is based on the income tax you have paid in the year and is split into two payments. This will reduce the amount you have to pay for the following year if all your figures remain the same. If you know for certain you will not earn as much the following year; you can apply for a reduction in the payment on account.
You need the following information to calculate your income tax:
- P60 from your company
- Dividend vouchers from your company
- P11d for any benefits in kind you may have taken
If you lend money to your limited company you are able to charge interest at a commercial rate. For example, if you paid yourself a salary of £8,164, the maximum you can pay yourself tax and NI free, and you have no other income other than interest and dividends direct from your limited company, up to £6,000 of interest earned is tax free. Therefore, if you lend money to your limited company and do charge interest, this interest is deductible before calculating the corporation tax you are due to pay as well as being a tax free benefit for personal taxation purposes. The maximum corporation tax savings for the Financial Year 2018 is £1,140.
Corporation tax is due nine months and one day after the year-end.
VAT is due one month and seven days after the end of the VAT quarter.
Personal income tax is due on the 31st January, and payment of account is due on 31st July.
You can also find a fully comprehensive tax calendar here for all your tax obligations.
Mirandus Accountants supporting local businesses in the City of London and Greater London area, providing accounting and tax services to SMEs and OMB clients and access and training on QuickBooks.
Why not give us a call to see how we can help you be tax efficient.