Limited Company or Sole Trader

[sshah20]

Hi All,

I have started business recently but not yet registered with Company house or HM Revenue. I want to registered it ASAP but confused in the type of business. shall I go for Sole Trader or shall I go for Limited company?. I am on tier 1 general visa.


regards


shah

[AccountantMatthew]

In short there are pros and cons to each so make sure you do thorough research before deciding which is best for you - and know exactly what you are letting yourself in for. Don't just look at it from a 'can I save tax(?)' point of view.

Different people will have a different opinion so best get the facts first. A good place to start is here:

http://www.businesslink.gov.uk/bdotg/ac ... 1073858805

[sshah20]

I am in the process of opening a limited company but not sure about taxes.
I will draw minimum salary every month and I am sure that NI and tax will be minimum for this amount. and if I take dividend from the company I will have to pay corporate tax on it as employee(Director).

I have one question in my mind that if I take dividend from company it means that the company is in profit. My question is would company pay tax and NI on gross profit? if the answer of this question is yes then it means that I will pay taxes on dividend and also on gross profit.

please clarify this question as I am confused.


Shah

[AccountantMatthew]

You pay income tax and class 1 National Insurance on salary. However more than a few one man contractor companies pay themselves a salary of £589 per month (for 2011-12 tax year) - this is the highest amount at which no National Insurance and income tax is due.

Dividends are an appropriation of profit. They are subject to income tax on the individual (although the individual may not ultimately have to pay income tax on the dividends; it depends on total income). Companies do not pay Corporation Tax on dividends. They have already paid Corporation Tax on company profits.

Companies pay Corporation Tax on (taxable) profits.

Do remember that you as an individual and the company are separate legal persons - daft as that seems, people have been known to get the two confused.

[sshah20]

thanks alot AccountantMatthew,
sorry, I mean that company pay corporate tax on profit and employees pay income tax on dividend.

I have a question regarding corporate tax and tax on dividend. I am sole director of a limited company and I draw minimum salary every month on which NI and tax is minimum. if company made profit I know that Company will be liable for corporate tax which is 20%(ultimately I will be the person who will pay corporate tax as sole Director and employee) but if company declare the whole profit as dividend will I pay income tax on it which is 10%(as employee)?

I spoke today to one Accountant and he said if the dividend is less then £50000 then you will not be liable for income tax.
I am on tier 1 general and I have to show earning upto £26K.

Can you please comment on this?

[John]

I spoke today to one Accountant and he said if the dividend is less then £50000 then you will not be liable for income tax.

Where is that Accountant? The UK, or cloud cuckoo land?

Your thoughts are seriously confused. You really do need to seek professional advice before you are able to understand the Sole Trader / Limited Company issue.

In particular, tax is only ever one aspect. There are other issues as well.

[AccountantMatthew]

As John says - £50,000 is an incorrect figure.

For any dividends that fall into the higher rate tax band you will pay an effective tax rate of 25%; for dividends that fall into the basic rate tax band the effective rate is 0%. Now this is the effective rate rather than the actual tax rate less tax credit but we'll keep it simple.

To determine which band you fall into, you will take your total income from all sources. For 2011-12, the first £7,475 is your personal allowance, the next £35,000 is the basic rate and then from £35,001 to £150,000 it is the higher rate.

Now there is a rate above £150k (the additional rate) and your personal allowance gets reduced after £100k but again we'll keep it simple.


Therefore a £50k dividend will never fall wholly within the basic rate tax band (and 0% effective tax rate). Some will be within the higher rate.

Finally I echo John with getting help at the earliest opportunity if you have already set up a limited company - by spending some money now you will save a lot of money and headache later.

If you are yet to decide then don't do anything until you have had professional advice. Again as John says, your decision should not be based solely on whether you save a little bit of tax - there are many other responsibilities in being the director of a company so other factors should be looked at.

[John]

AccountantMatthew, everything you post is of course correct. I just want to add one aspect ..... the Tax Credit added to the UK dividend.

The Tax Credit is one-ninth of the amount of the dividend, so if for example the dividend actually paid out by the company is say £36000, a Tax Credit of £4000 is added, making a gross total of £40000. and it is the £40000 that is subjected to the tax rates mentioned by AccountantMatthew.

Further, it is that Tax Credit that ensures that in respect of income below Higher Rates, that there is no tax to pay, at least on that part of the dividend.

As regards the £50000 figure previously mentioned, even if that is £45000 plus Tax Credit of £5000, there is clearly going to be some Higher Rate tax to pay. Even more so if we are talking about £50000 dividend plus £5555.56 Tax Credit.

[sshah20]

Thanks alot AccountantMatthew and john, for your prompt reply.

I have already set up a Ltd company as advised by my Accountant. but I am not sure about many things. as I said in my previous post that I am on tier 1 general which will expire in Dec, 2012 and I need earning of £26K. I have started a business of second hand clothes and its my full time job now. I don't have any idea about sole trader or Ltd company all I want to save tax(legally) and to extend my visa as well. if Ltd company is not a good option then I can dormant this company and can go for sole trader.

My Accountant said to me that you draw £600 every month on which there will no NI and Tax and take dividend. let suppose company made a gross profit of £30K and suppose no expenses so 20%(corporate tax of £30K will be £6K and the net profit will be £24K in this case. if company declare the whole net profit as dividend will I have to pay further 10% on this dividend?

[AccountantMatthew]

It's just easier if you speak to your accountant on this. What tax you pay, if any, on dividends depends on your total income and your accountant will have more information pertaining to your situation.

You're paying for their services so just ask them and they'll be able to help.