Setting up small ltd company

[LaydeeC]

Hi
I'm looking for advice on the above really. My husband has been offered work (following redundancy) as a consultant in his field. He has registered a ltd company (into which he will be paid). We are both a bit vague after that where to go for advice.
We know he needs a business bank account and are thinking of the Co-op and obviously some form of indemnity insurance. But how does he pay himself after he has invoiced the employer with the money being paid to the company and how does he pay his taxes/ni etc?
Do we need an accountant at this stage and, if so, where on earth do we find one?
All seems a bit scary as both of us have only ever been paye previously and don't want to fall foul of HMRC.
Any advice/guidance would be much appreciated.

If the work is done through a limited company then income can be withdrawn through taking a salary and/or withdrawing the profit after tax as dividend. The exact balance of the two is dependant on his age, other income, level of profits in the company, terms of the contract with the end customer etc etc. if he is doing work for only one client then there is some fairly complex anti-avoidance legislation that can really increase his tax bill if he's not careful. In short, I would recommend finding an accountant.

Thank you riksti, it all sounds very complicated to me - at present, yes it is only one client but that is likely to change quite soon.
Do you know, if he drew a salary as an employee, surely his tax codes would be the same as a paye employee (like me).

Yes, but as he is (I'm assuming) a director of his limited company it's his own responsibility to ensure the company is deducting tax correctly. He will have to set up a payroll scheme for the company and run the payroll if he wants to pay more than £5,500 (off the top of my head, the exact amount might be slightly different) as an annual salary to himself. This amount, however, is recommended to get his state pension entitlement year. (I am assuming here that he has no other income).

His tax code is based on his own circumstances and may be the same as yours but may not be.

He needs an accountant. Paying himself a small salary (to cover NI) and dividends could be more tax efficient than paying all out as salary. A good accountant will be able to advise what's best for his situation.

Thanks both
Sheesh, far more complex than either of us anticipated. I'm wondering if he might be better off (administratively rather than tax efficiently) going down the self-employed route.

I'd say it depends on the level of his earning potential. Go visit some local accountants (most give you at least a free half-hour) and see what fees they would quote for doing this tax planning / admin for you

It's not so hard, really - the start up is the most complicated bit, and if your husband is the sole employee of the ltd co, it really isn't hard at all.

I would say you do need an accountant, only because it sounds like you don't know much about it, and it could get stressy!

If your DP is doing this to earn in the most tax efficient way.... then he will want to pay himself a mix of salary and then take the rest in dividends, as they are taxed at a lower level. There is an 'optimum' amount to pay yourself, where you get your NI credit (towards your pension) but neither you nor the company has to pay class 1 NI contributions. It's around £620 per month, which annually would keep you under the personal tax threshold (no personal tax to pay) and then mean you pay yourself the rest in dividends, which are only taxed at 20 percent.

but I still say, get an accountant! I pay mine about a grand a year. They do my VAT Returns, my personal and corporate tax returns, and advise me when I need it.

It's not worth having a ltd co if you don't earn very much, or don't expect that to change - but if you pay a fair amount of personal tax at 40 percent, it's probably worth it.

That said, there are rules about the kind of work you can and can't do via a Personal service company (which is what this is) and you don't want to fall foul of those. Again an accountant will advice, but look up IR35 rules with HMRC.

Good luck.

Sorry, when I was talking about pay - I mean, if he wants to pay himself say 50 grand a year - he should take around £7,440 as actual salary (keeping under the tax threshold, keeping his Ni credit but not having to pay class 1) - then take the REMAINDER of his 50 grand as dividends.

Which are only taxed at 20 percent, hence the saving.

i guess it's not really worth doing if you earn under 40 grand, as the extra admin and costs versus potential savings don't make it worthwhile. However, if you earn more, or expect to earn more, it's worth it, as long you qualify under IR35.

Hope that makes sense.

I'm not sure I agree with any of that wheresmespecs.

Forming a company is definately the easiest bit - it takes one email, £50 and a wait of 3 hours. Everything else is very much harder.

The company offering the work have presumably insisted that they pay him through his own company. This is because they don't want HMRC to look at the arrangements and say that he is an employee - and this means that the arrangements are vulnerable to being trapped by IR35, which you really don't want.

To avoid this you need an accountant who is familiar with IR35 and is going to offer you specific advice including a review of your contract terms.

Many people are confused that less income tax is paid if you take profits through dividends. This used to be the case, but is not any more. The saving that is made is in National Insurance. If you are self employed you pay 2% National Insurance on earnings over £42,475 (2012/13), so the savings are there for the higher earner but pretty marginal.

But someone earning only £25,000 pays Class 4 NI at 9%. This means that incorporation can save over £1,500 in tax and ni at that level of earnings, so you definately don't have to be a 40% taxpayer for incorporation to be worthwhile.

I didn't mean start up as in literally just setting up the company - they've already done that - I mean all the stuff you have have to at the start, from transferring a VAT number, notifying employers of changes, setting up and re-routing payments to a bank account - finding an accountant, even. Things that once they are done, are done.

There's nothing in the OP's post about the employer insisting they will only pay DH through a ltd company. It may be his decision. I said that they needed to be aware of IR35 and should find an accountant.

Paying yourself dividends instead of the equivalent in salary does mean you pay less in tax. It does also save (me) a lot in in terms of class 4, for sure.

To some degree, the point at which it is worth incorporating depends a lot on individual circumstances. No, you don't need to be a higher rate tax payer.... but for some people, the extra admin and increased accountancy costs aren't something they want to grapple with for a small profit. It's not a problem for others.

But OP, this is the internet.... look up IR35 while you find a good accountant is my best advice.

Dh contracts and has set up Ltd Co twice now.

Agree with getting an IR35 accountant. Dh is also a member of the PCG which provides insurance/legal cover should HMRC decide to take him on over IR35... Might be worth looking into similar - I assume it is similar to teachers being in a union.

That said, I do the book keeping and VAT returns (need to justify my salary) and once you're up and running, it's pretty straightforward.

wheresmespecs - I'm sorry but you are wrong - paying yourself dividends does not actually save you tax, it saves National Insurance.

MrAnchovy is correct in everything in his post.

Back to the OP, definitely get an accountant now. Your rough cost would be £700-£1,200 pa (+VAT) depending on the accountant and where you are. Get a qualified chartered accountant (with ACA or FCA after their name) and not just a bookkeeper or an 'accountant' as anyone can call themselves an 'accountant' with no qualifications.

Being self employed does save admin definitely but it also costs you a fair bit of money in extra tax/national insurance. You have to be more disciplined to run a limited company but it can save significant money.

A last tip, find yourselves an accountant who is also willing to train you how to do the basic tasks yourself. Then you can get on with the day to day tasks yourself.

Get an accountant. IR35 may get you otherwise. Assuming it does not and the company earns enough, you might be able to split the shares between the two of you and thereby each have 50% of divis and avoid a lot of higher rate tax.

"(with ACA or FCA after their name)"

... or CA, A/FCCA, A/FCMA or CTA - accountants may be good at sorting other people's business affairs but our organisation of our own profession is a mess.

Yes MrAnchovy, you're right.

OP - I'd still recommend a Chartered Accountant with ACA or FCA after their name but the other letters mentioned in MrAnchovy's post are also qualified accountants.

Hi. Agree that you should find a friendly accountant to talk to who can explain everything jargon free. Find someone who is specialised in contractors, they will be totally up to date with IR35 and can explain the salary/dividend situation. They may also be able to help you source insurances too. Often their websites are really good sources of free information. Your first meeting/ telephone/ skype chat should always be free and leave you in a good position to decide not only on appointing the accountant but the best trading method. It might have been a good idea to do that before setting up the Ltd Co if you are not sure about the benefit of that over self employed but at least you can be reassured now that you have made the right decision! Most of our clients run Ltd Co's as contractors/freelancers as it does save them money as no NI paid on dividends. It's worth getting the accountant to do some tax planning for both of you, to see if it's worthwhile you also being a shareholder in his company. Good luck :)

Get your husband along to your local chamber of commerce. They will help with general start up advice and can put you in the direction of a local accountancy firm. Totally agree you need a chartered accountanct/practice.

You might also find (depending upon where you live) your local council has a free business advice service within their business regeneration/economic dept.

i have an amazing accountant. friend recommended him and he is really reasonable, (based up north so lower overheads than any near me) smart guy, always able to help and very clever when it comes to tax!! Plus he's good with general advice... PM me if you want more info.