should I switch to a limited co?

[nojellybabies]

I would appreciate some wise words.
I've been a sole trader since 2004. In 2017-2018 I greatly increased my hours and consequently earnt £65,800 which is very exciting.
I've just done the tax return: tax was £20,000 (a third of what I earnt). I have very few expenses (people pay for my brain-work and I don't travel much) but the tax was still reasonable because I put £55000 into my private pension (much needed, as it has languished since 2004....).

This year (to 5th April 2019) I'm on track to earn £76,450. I already have a company set up but dormant. My options, I think, are either to pay practically everything into pension again or to switch to trading as a ltd co as then (if I understand rightly) everything will be taxed at 20%.

i'd appreciate some advice. I've been a bit lazy about this issue over the years but when I was earning under £40 k it didn't really make much difference. One factor that used to apply was that I wanted to make sure my national insurance contributions were maxed out for the sake of the old age pension, but I think that's taken care of now as I've paid them since 1997 without a break.

Thank you.

Depends on what you're going to do with the £76k of profits. The company tax rate is 19%, but you will also be taxed when you take the money out of the company, as dividends or wages. So if you just leave the money in the company, the tax is 19% but if you want to draw it out, you'll have another shed load of personal tax when you take it out.

Thank you bad bunny.
for a smart person I'm not that smart sometimes....

So let's say if in 2019-2020 (with hypothetical identical tax rates)

Company earns £70k in profit.
at the end of the year it needs to pay £13300 in tax.
That leaves £57k.
But if I paid that £57k to myself as a salary, I'd have a tax bill just as high....£34k at 20% and £12k at 40%. which is £15,600.

Well there's no point in that is there? feeling naive here....

If you had 70k profit, you'd pay yourself a paye salary of the tax free allowance (I think it's 12500 for the next tax year) leaving 57500 that you'd pay 10925 tax on, if you took all of that as dividends you'd get 2000 tax free, with 55500 to pay tax on at the basic and higher rate which are slightly less for dividends than paye. I think that's just over 8.5k. If you happen to have a wife employed at your limited company and she doesn't have any other earnings, she can also take the same tax free amounts to reduce the company tax liability.

You wouldn’t pay tax on money the company put into your pension though .

Reading that back you'd need to leave an amount in the company to pay the company tax so your dividend amount would be reduced by that tax amount anyway making the taxable dividends less.

Dividend tax would be just over 5600 I think, and yes you can add some to your pension too to reduce further

thank you user and calvinsman. It's complicated!

Is is "just" an accountant job?

I also just the IR35 test which said I was employed - but that would mean I was employed by about 10 different customers (I tend to work for 10-12 customers in any year) which surely makes no sense?

I have a limited company not for tax purposes but because I own a house so don’t want it tied to the business

There are various online calculators which will show the benefit of using a limited company rather than working as a sole trader. For example:
www.google.com/amp/s/www.reedaccountancyltd.co.uk/single-post/2017/12/08/Self-Employed-or-Limited-Company-1819-Tax-Year%3f_amp_

You might need to consider if you will have to pay any professional fees for running an active company and payroll costs.

You surely have an accountant who can give you proper advice? You need to be aware of the threshold at which you're liable to be registered for VAT, and the changes coming in which mean you have to submit returns digitally & pay tax due on that return.

I've never needed an accountant. Every time I've been challenged on this no-one has ever been able to find any tax saving I might make (I don't have many deductible expenses). So it has all been super-simple and even with the higher earnings last year I just shoved it all into the pension - which was necessary to do .
Remember that if your earnings are below £80k you can record your expenses in simplified form.
Plus, let's face it, the tax-checking people will look at my history and think "she pays over the odds, we'll leave her alone." I'm a pretty low candidate to be checked as I've almost certainly paid slightly too much.

I understand Calvin, and it would be a relief to divide personal assets from the business for that reason alone.

Justajot - what a useful article - thank you.

I also like the fact that I just pay myself a wage and my personal and business money is completely separate. When I was self employed I wouldn’t ever want to spend any money because it didn’t feel like my money. Now I get paid on the 20th of the month just like a normal person and that money is all mine.

We are using Free Agent which does all of DH's VAT returns, payroll filings etc. I don't anticipate using an accountant, but filing a corp tax return and whatever accounts we need to are uncharted territory at the moment.

Seriously OP: I would get an accountant! They can save you money, save the worry and advise you on longer term planning. They are always worth the fee in savings and it’s great to have someone on the phone to answer questions

Thank you. Free Agent sounds good for VAT. VAT is likely to become a big part of my life if things continue to go well.

Yes, and you have a potential decision to make about whether to go for flat rate vat or any of the other options.

www.gov.uk/vat-registration-thresholds

oh thank you, very interesting.

ok - here are some calcs:
For a ltd company - if your revenues are £70k

Pay yourself £8424 per year salary - this is the current primary threshold, so you get your annual NI credit but don't pay any employer or employee contributions.

Assume your annual expenses are £3000

So annual profit of £58,576.

Corporation tax 19% on profits = £11,129.44

So you can pay yourself maximum dividends of £47,446.56

Total income (dividend + salary) £58,870.56

Total personal tax on this = £5,856.68 (dividend tax rates here www.gov.uk/tax-on-dividends, plus remember your personal allowance)

So net income = £53,013.88

Sorry, small mistake. total personal tax = £5,531.68

So net income = £53,338.88

Ooh, great thread.

I don’t think flat rate vat would be for me as I buy very very few goods: an ipad here, about £500in toner cartridges..... if I could join I guess I’d charge 20% but pay 16.5% to hmrc

Flat rate is good is you buy few vat paid items. It also reduces admin. You'll have to work the numbers yourself to see if flat rate is worthwhile

If you become VAT registered then your prices go up by 20%. Not a problem if your clients recover the VAT, but that is not always the case

Flat rate VAT also reduces risk if you are inspected by the VAT man (or woman)

Ah Sorry I think I had misunderstood flat rate

So let’s say I buill £100,000 over The course of the year. I get paid £120,000. And I believe that standard rate applies irrespective of whether I’m on the flat rate scheme.

If I stay on the standard rate then I pass HMRC a sum equal to £20,000 less VAT that I can evidence having paid out. However vote for the flat rate scheme and I pay HMRC6 £1650 ( or £1450 if I’m not a low-cost business). .In the latter case however I cannot reclaim the 20% VAT that I will have paid out for things like toner. cartridges.

Have I got it?

Thanks for your post by the way Queen Doris