Some questions about Ltd vs Sole Trader and Self Employment

[Leafster]

Fuck knows tbh.

Just repeating what various accountant type people told me (three different firms).

If I could be arsed tracking the legislation etc, I wouldn't need them in the first place eh? And I can't.

/000s of micro business owners pov

LOL
Sorry I like to be up to date *grins*

I think one of the reasons many Accountants recommend taking a reasonable level of salary alongside dividends is they perceive their clients as risk averse and that the clients wouldn't want to risk an HMRC investigation and all that might involve. HMRC are more likely to investigate accounts where each director/shareholder takes the minimum level of salary and large dividends.

The tax savings from taking dividends instead of salary may be swallowed up by the additional costs associated with an investigation. It might also uncover other irregularities which could have gone unnoticed. (Not complying with IR35 for instance if it should have been applicable to the company)

Another issue which has been mentioned is that dividends can only be taken out if their are sufficient profits within the company at the time. Many small businesses don't always have timely and accurate accounting information to make a decision as to whether the company can afford a dividend. Taking a salary instead provides the money a director needs without this added complication and avoids possible problems with invalid dividends.

Yet another issue could be the borrowing requirements of the director. If they want to take out a mortgage it may be more difficult to prove their level of income is reliable if a substantial part of it is in the form of dividend.

 

[cesare]

I'm not going to pretend to be fully up to speed, or up to date, on this, but aiui there's a double taxation issue which complicates the position. Ltd Co dividends are taken from profits on which corporation tax has been paid. CT is on some sort of sliding scale and so the overall tax position depends on the end of year profit, which in turn is dependent on the wages bill. The wage has to be set before the end of year profit is known, but CT can only be calculated afterwards. Personal income tax is then paid by the directors on this income from dividends, so the money is actually taxed twice. The gains depend on the CT tax scale, which chancellors alter in the budgets.

However, this is only a tax calculation. The true profit from this arrangement comes form the fact that there is no National Insurance payable on income from dividends. So someone paying themselves minimum wage while taking an income of many tens of thousands of pounds is ripping the rest of us off on NI. I hope the people that do this can live with their selfish greed, my view is that they're just about the only group of people I'd like to see the NHS turn away.

But for the vast majority of micro business owners, they're not raking in tens of thousands. And that NI effect means they probably won't get full state pension, such as it is.

 

[Leafster]

However, this is only a tax calculation. The true profit from this arrangement comes form the fact that there is no National Insurance payable on income from dividends. So someone paying themselves minimum wage while taking an income of many tens of thousands of pounds is ripping the rest of us off on NI. I hope the people that do this can live with their selfish greed, my view is that they're just about the only group of people I'd like to see the NHS turn away.

I think the issue of avoiding NI is for another thread but my view is that NI should be abolished and the rates of income tax should be adjusted to take account of it. There would then be no distinction between salary and dividends and no need for half-baked legislation like IR35.

 

[GoneCoastal]

I thought someone would pick that up thats why I mentioned the correct reason for starting a company being for growth not as a tax saving vehicle


But as the state doesn't own anyone's gross income, only the portion paid as various taxes, Plenty of people live with those choices quite happily. As many others would if they were in the position of having that choice

It'd be.somewhat difficult to say "oh you can't be treated on the nhs because you didn't break the law though " and what about isa's ? That's using a legal means of reducing Tax?

When tax law changes - people usually obey it you know. Any way... methinks that's a different thread

 

[cesare]

Working for yourself shouldn't be a way of avoiding tax

 

[GoneCoastal]

I think the issue of avoiding NI is for another thread but my view is that NI should be abolished and the rates of income tax should be adjusted to take account of it. There would then be no distinction between salary and dividends and no need for half-baked legislation like IR35.

Yep... I definitely agree about IT35. It could be much simplified and still have the same outcome.. ie stopping mis use of ltd company for tax reduction.

 

[newbie]

But for the vast majority of micro business owners, they're not raking in tens of thousands.

maybe not but this particular fiddle is popular among the computer contractor fraternity, the ones IR35 was aimed at, who can earn very good money.

And that NI effect means they probably won't get full state pension, such as it is.

yes they will, their company has to pay them national minimum wage and the associated NI, which contributes towards a full pension (as it should, of course)

 

[newbie]

I think the issue of avoiding NI is for another thread but my view is that NI should be abolished and the rates of income tax should be adjusted to take account of it.

fine, argue for that but it's entirel;y wrong that people simply don't pay it.

fwiw I think that if it is to exist it should be payable on all income, earned or otherwise, and there shouldn't be a cap.

 

[GoneCoastal]

Working for yourself shouldn't be a way of avoiding tax

That's why I said the correct reason to start a business should be for.growth etc

However, every self employed person I know one of the first subjects in conversation is what you can expense and thus reduce tax... that's most of the sole traders I know BTW not company directors/shareholders

 

[Leafster]

yes they will, their company has to pay them national minimum wage and the associated NI, which contributes towards a full pension (as it should, of course)

That's not strictly correct. Company directors who do not have a contract of employment are outside the scope of the National Minimum Wage legislation so wouldn't necessarily earn sufficient in their capacity as officers of the company to be in a position to pay NI.

 

[sleaterkinney]

However, this is only a tax calculation. The true profit from this arrangement comes form the fact that there is no National Insurance payable on income from dividends. So someone paying themselves minimum wage while taking an income of many tens of thousands of pounds is ripping the rest of us off on NI. I hope the people that do this can live with their selfish greed, my view is that they're just about the only group of people I'd like to see the NHS turn away.

If they are employing themselves through a ltd company they have to pay both employers and employees national insurance. (I think) the main advantage is that corporation tax is lower than income tax.

 

[newbie]

That's not strictly correct. Company directors who do not have a contract of employment are outside the scope of the National Minimum Wage legislation so wouldn't necessarily earn sufficient in their capacity as officers of the company to be in a position to pay NI.

I'm talking about the classic IT contractor company, where the director is also the only employee. The scam under discussion doesn't apply to directors who don't also work for the company.

 

[newbie]

If they are employing themselves through a ltd company they have to pay both employers and employees national insurance.

true but that increases the incentive to pay minimum wage + dividends, so employers NI is lower. The alternative, to pay a high wage and take low dividends, maximises both employee and employer NI.

 

[Leafster]

I'm talking about the classic IT contractor company, where the director is also the only employee. The scam under discussion doesn't apply to directors who don't also work for the company.

What I was getting at was that even in the case of an IT contractor who is the sole worker in his own company he may not have a contract of employment and therefore his salary would be for his services as a director and, as such, exempt from the NMW legislation.

I know it's unfair btw.

Sorry zenie, we've wandered off your original topic.

 

[newbie]

is that legal? if the company income is from selling his/her services as a programmer or something, can he/she be salaried only for services as director?

 

[Leafster]

is that legal? if the company income is from selling his/her services as a programmer or something, can he/she be salaried only for services as director?

Company directors

The NMW does not apply to company directors unless they also have contracts that make them workers. Company directors are office holders in common law and can do work and be paid for it in that capacity. This is true no matter what sort of work is done or how it is rewarded.

Link

 

[newbie]

I'm having a problem envisaging a company which has an income from selling, eg programming services, but has no employee to actually do any programming. It does, however, have someone paid NMW for 'services as director' and makes a healthy profit. Maybe it's legal and the IR doesn't mind, I dunno.

 

[Giles]

But the salary's got to be commensurate with what you'd earn if employed in that capacity in the marketplace. The salary/dividend benefit has been eroded away for micro business owners.

No it has not.

You can take whatever you want (provided your company is generating the business, obviously!) as salary and then the rest as dividends.

There is no "requirement" to take set amounts as salary according to your "trade" - after all, who says what you earn? If its your own business, its you.

I always used to take just enough salary to cover NI contributions, and the rest as dividends.

Giles..

 

[cesare]

No it has not.

You can take whatever you want (provided your company is generating the business, obviously!) as salary and then the rest as dividends.

There is no "requirement" to take set amounts as salary according to your "trade" - after all, who says what you earn? If its your own business, its you.

I always used to take just enough salary to cover NI contributions, and the rest as dividends.

Giles..

Are you an accountant?

 

[Giles]

Are you an accountant?

No, I am not.

But our chartered accountant told me and a business partner that it was absolutely fine to take a fairly minimal amount by way of salary and the remainder (when we had actually earned enough and if we didn't want to leave it in the company for expansion) as dividends.

This arrangement carried on for around 8 years and IR / HMRC raised no issues about it.

It would plainly be silly, as other posters have pointed out, for the taxman to tell you how much you had to pay yourself out of your start-up business, let alone to vary that amount depending on what jobs you had done previous to starting your own firm.

Often people choose to leave some of their earnings in the company to fund future plans for the business - why should the taxman be able to tell them "you used to earn £50K, so I am going to order you to pay yourself £50K now"?

Giles..

 

[zenie]

Who knows about Trademarks or should I start a new thread?

 

[zenie]

Who has or is a nice accountant in London?

I still have tonnes of questions as I think it may be more beneficial to go the limited route and no, I don't want to spread my business all over the internet on different forums.

 

[Griff]

Who has or is a nice accountant in London?

I had a seriously good one, but he was a bit out of your way in Epping. Got me all sorts of tax refunds I wouldn't have thought possible.

 

[zenie]

Thanks Griff, that is a bit far.

I need to know about tax deductable training and it's very confusing

 

[Leafster]

Thanks Griff, that is a bit far.

I need to know about tax deductable training and it's very confusing

The basic principle is that training to maintain your existing skills in your trade or profession is usually allowable.

Training to expand your existing range of skills should also be allowable so long as it doesn't stray too far from your core skillset.

Training in a totally new area of expertise will not be allowable as it won't increase your ability to do your existing trade or profession.