Beneficial to go from sole trader to limited company?

[PermaShattered]

I'm a sole trader (writing business which is growing each year) and this current tax year I'll be earning around £25,000 - I've just read on a different thread (and my query is in there too but thought I'd start a new thread!) that being a limited company can save tax? How does it work?

Is it easy to set up at company or do you need someone to do it for you? I've heard from other sources that it can save money.

Any advice would help me please! Thanks!x

as sole trader you pay tax on all profits, whether you draw them or not

in company would pay smallish salary, just under the personal allowance limit, so no tax or NI there.
You would then pay corporation tax on the remaining profits, at 21% (or 20% when it drops) but no NI, so less than you do as a sole trader.
You then pay out the remaining profits as dividends, which attract no further tax (and no NI) as long as you are not a higher rate tax payer.

Significant saving.

You can set up the company yourself easily.

BUT, you should have someone to do your accounts and tax unless you know what you are doing (which you don't or you wouldn't be asking the question).

How much do you pay in accountancy fees at the moment? Personally I would probably charge £1,500 for this, although you could get it for less.

You could also look at selling your goodwill to company, at this level some/most would be under the capital gains limit - so no tax on the amount under the limit and only 10% tax (entrepreneurs relief) on the rest, but the company then owes you that money which can take out without further tax,

The disadvantage of paying a salary under the NI limit, of course, is that you aren't keeping up your NI record.

(Though of course you could pay just over the NI lower earnings level each month.)

The other advantage of course is the limited liability - DH & I moved from a partnership to ltd co because of this. Though I suppose unless your writing causes someone mental distress there's not so much possibility for problems in your trade!

Takver - if you pay just under the personal allowance for tax you are in fact maintaining your NI contributions, as you are in a small band where no payments are required but you are within the NI bands.

pay between the lower earnings limit and the primary threshold see table

Others beat me to it, but the key point is that small companies pay tax on their profits at 21% (20% next year) but if you are self employed you pay tax at 28% (29% next year) - 20% income tax and 8% (9%) Class 4 NI.

It is theoretically possible to meet all the requirements for running a limited company yourself, but you would have to spend a lot of time finding out what to do (actually that is the easy bit, how to do it is the trick!) and if you get it wrong you are liable for penalties and they are generally less flexible with companies than they are for individuals: I wouldn't recommend it.

I don't currently provide this service, although I am considering offering it in the near future. You can discuss this and get in touch with a few people who do this kind of thing for upwards of £600 a year on the UK Business Forums - Accounts and Finance section.

I would say that 90% of the small business owners we see can save tax by doing this. We are almost always more expensive than their current accountant - and we can almost always save them money overall (ie less tax plus increased accountancy fee = overall saving).
yes, they could go elsewhere and get it for a cheaper accountancy fee, but in a lot of cases I find their existing small sole trader accountant telling them it is a bad idea (mainly because the accountant doesn't want the hassle of dealing with companies).

But (just looking into this myself)...
Won't you pay employers NI on the small salary to pay yourself (to keep up your NI record)
And I thought dividends were taxed at 10%, thus removing any saving you may make (Corporation tax versus Income tax)

Well, you get credited with NI if you are paid more than the Lower Earnings Limit, currently £5,044 a year. But you don't pay NI until you reach the Earnings Threshold, currently £5,715 a year. (Note in 2011/12 the threshold is different for employees (now called the Primary Threshold) and employers (Secondary Threshold). Some people going down this route therefore pay themselves £5,700 a year or similar and then there is no NI to pay.

The situation is much the same if you pay a little bit of NI by using all of your personal allowace for income tax - so you take a salary of £6,400 and pay £163 total NI (if you took £700 less salary out you would pay £165 more corporation tax).

Basic rate taxpayers pay tax at 10% on dividend income, but dividends come with a 10% tax credit so there is no additional tax to pay.

I'm also thinking about doing this
So the costs involved would be £1500 p/a (approx) accountancy + £15 p/a to Companies house, plus a set up fee of approx £600 if you're too clueless busy to go through process of setting up yourself.
Any other hidden costs?

So (ignoring the basic salary and NI bit)
For every £100 which comes through the door of the Ltd Company:
£21 will go on Corporation Tax
£10 will go on Dividend Tax
£69 will come to me

How is that better than being a sole trader, I would earn £100
£20 would go in Income Tax
£8 would go on NI
£72 would come to me

Or have I got it wrong (and are you going to start charging me for advice any minute now )

Zil131 that's a really good, simple way of looking at it - allowances and thresholds don't make a huge amount of difference between the two situations.

But the numbers are wrong: the dividend tax credit is not paid by the company so this is what we have:

For every £100 profit of the Ltd Company:
£21 will go on Corporation Tax
£79 will come to you as divided and you will have no more tax to pay.

As a sole trader for every £100 of profit
£20 will go in Income Tax
£ 8 will go on NI
£72 will be left for you

£9 on NI from April !!

Now look at these figures for 2011/12:

For every £100 profit of the Ltd Company:
£20 will go on Corporation Tax
£80 will come to you as divided and you will have no more tax to pay.

As a sole trader for every £100 of profit
£20 will go in Income Tax
£ 9 will go on NI
£71 will be left for you

Once you get over the higher rate thresholds things get less good, but by then you are nearly £4,000 a year better off:

For every £100 profit of the Ltd Company:
£20 will go on Corporation Tax
£80 will come to you as dividend
£20 Income Tax will be due on the dividends (net of the credit received)
£60 will be left in your pocket

As a sole trader for every £100 of profit:
£40 will go in Income Tax
£ 2 will go on NI
£58 will be left for you

Oooh - good point well made.
I think you are justifying the accountancy fees!

(Right must stop playing on MN and go and do some work, or there will be no money no matter what company structure I choose )

Thanks!

Thanks for ALL your replies, really appreciated! Will read through them all carefully and will add any more questions i have. Thanks again!

marking :-)

As this thread seems to be attracting a bit of attention I think I'll point out that it is possible to get a good service for limited company accounts and tax for a lot less than £1,500.

There a number of firms that regularly post on the UK Business Forums that will do this for less than £600 a year.

Company formation and registration with HMRC should not cost more than £100.

Agreed.
£1500 a year implies a lazy accountant or your records are a mess
the information on UKBF is excellent
even if some of the posters do not understand paypal!

Oh dear, I really didn't want to turn this into a pissing contest.

I absolutely do not agree that a quote for £1,500 for this work implies a lazy accountant or your records are a mess.

And nor is it true that you will always get good value from an accountant that quotes £600 for the same work.

Different accounting practices have different business models and different service propositions the same as, for example, different restaurants.

MrAnchovy
The main thing with accountants is that they have to inspire confidence in the client as we tend to find out A LOT about them over the years.
And there are so many who do not for myriad reasons.

Then again, this article nearly drove me to email in...
www.guardian.co.uk/money/2011/jan/29/dear-jeremy-work-advice second item...

Marking my place. Also thinking of doing the same, my accountant said it is well worth my while doing so.

I agree £1,500 (which I would look at charging) is quite a lot - not because I am lazy but mainly because as a reasonably large practice we have a lot more over-heads than your sole trader, these overheads are then built into out charge our rates, and I have to justify my own time and costs to my employers.
At over £125 an hour I am not going to be able to produce a set of CA2006 and GAAP compliant statutory accounts (often from a bag of records with no order to them at the last minute, so add in the cost of me having to chase to get the records in for 7 months) plus a company tax computation and return, dividend vouchers through the year, annual return, director's personal tax return (and often spouse's return as well), P11d if necessary, assistance with VAT returns, general advice AND looking for the things that will add value and save them money for £600.

I also said that you could get it for less.

and equally you should NOT just think "oh, I'll incorporate" and do it yourself, and then find an accountant a year or more later when your accounts need doing.
You may be able to save yourself significant amounts of tax as part of the incorporation process (I deal with a business that was a partnership than has incorporated, and as part of this will save themselves over £200,000 over the next few years). Things like this need to be thought about and planned in advance, not after the event.