If you set up your business as a limited company, it means it’s a separate legal entity - which has some pros and cons. You’re protected from its financial problems - but in exchange, there are restrictions on getting the money out and more onerous reporting requirements.
It’s also easier to arrange your finances to minimise tax with a limited company than with the common alternative, sole trading.
Limited company: overview
If your business is a limited company, it is owned by its shareholders. Even if you are the only shareholder, the business’s assets and liabilities are separate to yours:
- You are protected from its liabilities (if the company can’t afford to pay its bills because a customer won’t pay, instance).
- But the companies assets are its own - so there are rules on withdrawing the money, for instance.
- Reporting and accounting requirements are more onerous than as a sole trader.
- It’s easier to arrange to take money out of the company in a tax-efficient way.
Tax, NI and VAT for the limited company
The company’s tax affairs are separate to yours. You need to account for its income and expenditure, and you’ll pay corporation tax on the company’s profits.
Income tax
Owners of businesses set up as limited companies often pay themselves a low wage, and take money out of the company as dividends (as a way to minimise tax and NI payments). You have to pay income tax via PAYE on any salary you pay yourself.
If you pay yourself a dividend (and in any case if you’re a director of the company), you’ll have to fill out an annual tax return.
National Insurance
By paying yourself a dividend (and a low salary), you can reduce your national insurance payments. NICs affect your entitlement to benefits, so don’t avoid them altogether (and nor can you if your business is succesful - you’ll have to pay yourself at least the minimum wage, which will take you into NIC territory).
As a director, you’re an employee of your company. So you pay Class 1 primary NICs at 11 per cent on your earnings between the earnings threshold (£453/month in 2009/10) and the upper earnings limit (UEL: £3,337/month in 2009/10). Above the UEL, you pay at a rate of 1 per cent.
The company has to pay Class 1 secondary contributions - 12.8 per cent (in 2009/10) on the earnings over the earnings threshold. The company may also have to pay class 1a contributions on certain benefits in kind, like a company car (learn more about the various NIC types here).
VAT
As with any business, if your turnover is expected to exceed £68,000 a year (from 1 May 2009), you’ll have to register for VAT. There are pros and cons to this:
- VAT-registered companies have to charge your customers VAT (putting your prices up) …
- … but you can also reclaim VAT on things you buy (reducing your costs).
- All this means extra record keeping (although you could consider the flat rate vat scheme)
- But some people will see VAT-registered companies as more respectable.
Corporation tax
Your business pays corporation tax on its taxable profits. The rules for corporation tax are more complicated when you set up your business. But that aside, it’s essentially based on the company’s income less its costs, allowances, reliefs, deductions etc.
Rates vary depending on your profits - but in 2009-10, you pay corporation tax at a rate of 21 per cent when your profits don’t exceed £300,000.
Corporation tax can be complex - there’s more information on it here. But whatever your situation, make sure you tell HMRC that the company is liable for corporation tax, and that you pay it and file the company’s return on time.
It’s generally easier to get an accountant to do all this for you.
Seting up your company
Before you begin trading, you need to register your company with the Registrar of Companies (Companies House). You’ll need to fill out various forms, and you’ll pay £20 to Companies House and about the same again for a set of Articles of Association. There’s more information at Companies House.
Again, if you’ve got an accountant, they can probably help you with all this.
Administration for the limited company: bad news
There’s a lot more paperwork to do if you’re a limited company - separate accounts and returns, filings to Companies House and so on.
Not to bang home the point, but if you’d rather concentrate on running the business, get your accountant to sort all this out, at least until you’ve got time and are confident about what’s needed.
Liability for a limited company: good news
The business is separate to you. So its debts are not yours. However, if you’ve had to guarantee any loan you’ll still be liable for this. And there are obligations on directors, so if the business is in trouble, take professional advice. If you get this wrong, you can still become personally liable, as a director, for the company’s debts.
Contractors: watch out for IR35
If your business is essentially your time - EG you are a contractor or consultant - and you’re using your limited company just as a way to reduce tax, you might get caught by IR35 (HMRC explanation). This will affect your tax treatment (in a bad way).
If you run a normal business selling goods or services to several individuals or companies, you can ignore IR35. If your company is selling your time for significant periods, make sure you read up on IR35 and ways not to get caught. The Professional Contractors Group is a good place to start.
Hi, I am reading up on IR35 and am unsure whether or not it would affect our company. We are aiming to set up our company next month (as a sole trader partnership or Ltd company). We are personal trainers providing personla fitness training to a range of clients. I hope i have provided enough information for you to be able to answer my question. Thank’s for your help.
Gwion
Gwion - you would need to seek professional advice to be certain. Based on what you’ve said, you’re providing work for multiple clients at your own risk and using your own equipment so it would seem to me to be unlikely that you would be caught by IR35. However, I’d seek some proper advice if you’re worried - or try asking a question in one of the many small business forums.
I run my own limited business which is a website business, i went to a web designer paid out a lot of money for a site to be built, they gave me a date of when it was going to be completed, so i signed up to places like yell and mobile phone contracts also card processing and factoring and other adverts, in the end the web company done a runner and ovs closed down, i have been paying my contracts using my working tax credits instead of our selves because we have another web company designing it now, but we are thinking about closing it down because the pressure is too much, and my girlfriend to become a sole trader and start again with the idea can we do this? the web company is happy to change all paperwork over to my girlfriend but the site is not going to be ready for the next 2 months and we just cant afford to keep on trying to pay the business bills
Si - I think you need professional advice. Try your local business link or your accountant if you have one.
I am currently employed (PAYE) as a work place trainer. I visit several companies throughout the day providing training to employees. I would like to consider setting up a limited company and opting for a consultant basis with the same employer (option is available) but with a view of working for other companies as demand is high. I understand the basics of IR35 and understand that working for one company would fall into this. I would also be looking to expand the business and take on some other freelance trainers and offloading some contracts. Please could someone give me some advice around the types of things that can be offloaded as expenses against the business as I have been told that car expenses, travelling and even house hold bills can be claimed for. If I was to pay myself a wage would it need to the NMW. Any other advice would also be appreciated..
Hi guys. I have a limited company and made a profit this year but I have just lost 7 months business forecast. I have had to pay 12k on my corporation tax but, I have to pay my self a wage for 6 months after that. I zero funds, can I roll this back as a loss. I am not going to make a profit this coming year infact I will not be able to pay myself a wage after 6 months
Steff: You can read all about how to deal with losses on the HMRC site: http://www.hmrc.gov.uk/ct/forms-rates/claims/losses.htm