Last week’s Setting Up Your Business – Part 1, reviewed two potential options for your new set ups business structure. After assessing if Sole Trader and/or Partnership is right for you, if you feel that you are ready for something larger, a Limited Company might be right for you, this weeks installment will run through the basics to help you make the right choice for you.
A Limited Company is an entity in its own right and is responsible for everything that it does. Its finances are kept separate to your own personal finances.
A Limited Company is operated by Directors who are responsible for running the Company in the best interests of the shareholders. The Directors may also be shareholders.
As a director of a limited company, you must:
- try to make the company a success, using your skills, experience and judgment
- follow the company’s rules, shown in its articles of association
- make decisions for the benefit of the company, not yourself
- tell other shareholders if you might personally benefit from a transaction the company makes
- keep company records and report changes to Companies House and H.M. Revenue and Customs (HMRC)
- make sure the company’s accounts are a ‘true and fair view’ of the business’ finances
- file your accounts with Companies House and your Company Tax Return with HMRC
- pay Corporation Tax
- register for Self-Assessmentand send a personal Self-Assessment tax return every year – unless it’s a non-profit organisation (eg a charity) and you didn’t get any pay or benefits, like a company car
You can hire other people to manage some of these things day-to-day such as a Certified or Chartered Accountant, but you’re still legally responsible for your company’s records, accounts and performance. You may be personally liable for your company’s business liabilities and be fined, prosecuted or disqualified as a company director if you do not follow the rules.
There are three ways in which you can draw money from a Limited Company:
Salary, expenses and benefits
The Limited Company can register as an employer and you can then draw a Salary from the Company. You will pay Income tax and National Insurance in the same way as any other employee however, as a Director you can defer your National Insurance Contribution deductions until your actual salary reaches the annual threshold. The Company will also pay employers contributions to HMRC with respect to your salary.
Reasonable expenses incurred wholly and exclusively in the course of the running of the business can also be claimed from the Company.
If you or an employee of the Company uses items owned by the Company personally then this must be reported as a benefit received and may also be subject to income tax. There are also some benefits that are ‘tax free’ for the employee however each one is subject to specific rules:
- Workplace car parking
- Pension contributions
- One mobile phone
- Staff parties (costing up to £150 per head)
- Qualifying child care (basic rate tax relief only)
- Relocation costs
- Relevant training
- Long-service awards
- In-house gyms and sports facilities
- Cheap/free canteen meals
- Gifts unconnected with work (e.g. wedding gifts)
- Electric cars
- Business mileage payments
- Work and safety clothes
- Overnight expenses if away on business
In addition to the tax free benefits, further savings can be made. With many benefits-in-kind, the employee has to pay Income Tax at the usual rates and the employer has to pay National Insurance at but there is no employee’s National Insurance. Most benefits-in-kind will therefore provide a saving with respect to employee’s National Insurance. For a basic rate tax payer this is an attractive prospect. These types of benefits would include things such as paying for an employee’s gym membership.
If your Company makes a profit, then the shareholders can be paid Dividends. The first £5,000 of dividend income in each tax year will be tax-free. Sums above that will be taxed at 7.5 per cent for basic-rate taxpayers, 32.5 per cent for higher-rate taxpayers and 38.1 per cent for additional-rate taxpayers. The new tax came into effect on April 6, 2016. No tax will be deducted at source and taxpayers must use self-assessment to pay any tax due.
If you draw more money from the Company that you have put into it then this would be classified as a Directors Loan. If your company makes directors’ loans, you must keep records of them. You may have to pay tax on director’s loans. Your company may also have to pay tax if you’re a shareholder (sometimes called a ‘participator’) as well as a director. Your personal and company tax responsibilities depend on how the loan is settled. You also need to check if you have extra tax responsibilities if:
- the loan was more than £10,000 (£5,000 in 2013-14)
- you paid your company interest on the loan below the official rate
After reading this two part summary of the potential business structures available to you, you will note that there are pros and cons each structure and what may be right for one start up may not be fit for another. Discussing your options with an Accountant will help you to make the best decision for you. You can view our Choosing Your Accountant article from the beginning of the month if you don’t already have one selected. Don’t forget, if you are a contractor, then you might need to deal with a specialist firm of Accountants for Contractors as there are also other considerations (we provided more details about this in Part 1 if you’ve only just joined us).