Setting up Your Business – Part 2

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
  • Bicycles
  • 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.

Dividends

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.

Directors Loans

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).

Auto Enrolment

Auto enrolment is a huge change in the employment landscape for UK businesses, yet many business owners and employers haven’t even heard about workplace pensions and have no idea what automatic enrolment is. It has long been recognised that most people are not saving enough for retirement and, as a result may not be able to afford to live comfortably in their retirement on just the State Pension. As people are also living longer, there is increasing strain on the State benefits system, so private pension provision is becoming increasingly important.

In order to encourage workers to start building up retirement benefits, pension reforms were introduced by the Government through the Pensions Act 2008 that requires all employers to offer workplace pension schemes and to enrol eligible workers into their schemes. These reforms have become known as automatic enrolment.

The reforms recognise that not all workers are eligible for automatic enrolment and that others, such as the self-employed, do not qualify. Provision has been made to allow those who fall outside of automatic enrolment to also join pension schemes and start building retirement benefits.

Automatic enrolment has been designed so that eligible workers who want to build up retirement savings don’t have to take any action themselves – employers will automatically enrol eligible workers into a workplace pension scheme and deduct any contributions that the member is required to pay from their wages or salary, and then pay into the pension scheme on their behalf.

What an employer must do

Your first step as a new employer should be to clarify your staging date. This is the date from which your Auto Enrolment reporting responsibilities will begin. You will need your employers PAYE References and details of your employee’s annual pay.

You will need to provide The Pensions Regulator with the contact details of the most senior person within your business as the nominated primary contact, you can also nominate a secondary contact. This should be someone who will be assisting in the implementation of the workplace pension in your business such as your payroll service provider or Accountant.

Auto enrolling your employees on time is vitally important and you should then submit a declaration of compliance to The Pensions Regulator. Employers must not try to coerce employees into not enrolling in the pension scheme.

This could be in the form of acting to discourage existing employees from auto enrolment or making it clear when hiring new employees that those who wish to be auto enrolled will be considered unfavourably.

Penalties for non compliance

If you do not comply with statutory notices, you may be issued with a fixed penalty notice. These types of penalties are set at £400.

The Pensions Regulator is also authorised to issue an escalating penalty. These types of penalties will vary depending on the number of staff you employ, for example, if you employ a high number of staff then the penalty will be much higher, with these penalties ranging from £50 to £10,000 per day.

The Pensions Regulator also have at their disposal an alternative the civil penalty. This penalty may be utilised if you fail to pay the contributions that you owe your staff when they contribute to their pension scheme. This penalty can be up to £5,000 for individuals, for example, business owners or managers. There can also be fines of up to £50,000 for the company itself.

The final option that The Pensions Regulator can call upon is the ‘Prohibited Recruitment Conduct Penalty Notice’. The severity of this penalty varies depending on how many staff are employed in the company and can range from £1,000 to £5,000.

The Pensions Regulator can and will initiate formal legal proceedings to recover penalties that businesses and employers have been issued with. Employers who are found to have breached their duties also face criminal prosecution.

Which employees need to be enrolled?

You will need to assess your employees to confirm who needs to be enrolled. The assessment can either be done manually or automatically using business software and will need to be carried out each time the workforce changes for example if a new employee joins or somebody has a birthday.

If you are using business software (for payroll, HR and pensions administration), this could be set up to automatically assess and monitor staff ages, earnings and pension contributions paid into a pension scheme both by members of staff and yourself. If you don’t, the table below shows how to assess staff based on their ages and how much they earn.

*State Pension Age

Employee has a right to join a pension scheme
If they ask, as an employer, you must provide a pension scheme for them, but you do not have to pay contributions into a pension scheme on their behalf.

Employee has a right to opt in
If your employee asks to be put into a pension scheme, you must put them in a pension scheme that can be used for automatic enrolment and pay regular contributions.

Employee must be enrolled
You must put these members of staff into a pension scheme that can be used for automatic enrolment and pay regular contributions. You do not need to ask their permission. If a member of staff gives notice, or you give them notice, to leave employment before you have completed this process, you then have a choice whether to enrol them or not. The employer also has a choice whether to enrol a director who meets these age and earnings criteria.

It is strongly advised that you take independent advice when setting up your pension scheme. You must bear in mind that most Certified and Chartered Accountants are not qualified as Financial Advisors and so whilst they may be able to help in the setting up and running of your Auto enrolment pension scheme they are not generally qualified to give advice concerning which pension provider you should use, in fact, unless they hold a suitable and current IFA qualification they would be in breach of the law in providing such advice.