UK Tax: Sole Trader v Limited Company - how to enter income?

tomwgftomwgf Member Posts: 11

Hi
(roughly) as a Sole Trader with a turnover of £40,000, expenses of £20,000, i get £11,000 tax free as personal allowance and pay 20% tax on remaining £9,000.
Tax: £1800
As a Limited Company with a turnover of £40,000, expenses of £20,000 plus list my £11,000 as wages, so expenses become £31,000. i get £11,000 tax free as personal allowance, then take the rest as bonus £9,000 of which £2000 will be tax free and i pay 8% tax on remaining £7000.
Tax: £640
Is this right?
OR
should my £11,000 as wages be left in the company and be counted as Profit and taxed at 19% before i then pay it to me as.. wages?
Tax: £2090 + £640

in which case - better off as a sole trader.

Or i am being very stupid and missing something obvious.

Comments

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 42

    Hi

    As a sole trader you don't just pay tax at 20%, you also pay Class 4 NIC's on profits above £8424 (current tax year) at a rate of 9% AND you have to pay Class 2 NIC at £2.95 per week. Using your example then with £20k of profit as sole trader you would be paying Class 4 NIC of £1042 and Class 2 NIC of £153. Your tax free amount this year is £11850 so your tax bill on £20k profit would be £1630. Your total taxes would therefore be £2825.
    **
    As a Ltd Company your salary could be set at £11850 to use your tax allowance, but there would be some Class 1 NIC's due of £411 for you, and £473 for the company (if you are the sole employee). The company tax would therefore be £1458. The company would have after tax profits available for dividend distribution of £6219, so if you took this solely for yourself then the first £2k is exempt from the dividend tax charge of 7.5%, so you would pay £316 for that. **Your total taxes would be £2658.
    You could charge the company Directors' loan account interest of £1k (tax exempt in your hands) which would reduce the company tax by £190 and reduce your dividend tax charge to £241, giving an overall tax charge of £2393 :)

    Remember that as a Ltd company it is going to cost more in Accountancy fees that for a sole trader, you would have extra compliance (eg payroll, additional returns to do, all company tax due in one instalment), but there are also some additional benefits in term of allowable expenditure (potentially).

    So, in answer to your question, are you missing something, I think the above illustrates that perhaps you are.

    Regards

    Andrew

    edited October 11, 2018
  • tomwgftomwgf Member Posts: 11

    hi andrew
    thanks so much for this!
    that explains a lot - and that i do put my income of 11850 as an wage expense.
    I am now a limited company and had an accountant for the first year but he was very expensive and very slow. So i did my own accounts for the second year which was majorly painful for my brain. So i was wondering a: if i was right to put my wages though as cost (the accountants accounts are hard to fathom, i suspect deliberately so), and b: whether i should go back to being a sole trader and the simple accounting.
    If the difference is £500 i am very tempted to go back to being a soletrader.

    but - how does 'the company Directors' loan account interest of £1k (tax exempt in your hands)' work exactly?
    what loan would that be?
    thanks again
    tom

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 42

    Hi Tom

    I trust you ran your pay through payroll and subjected it to PAYE? You cannot arbitrarily record that you took salary in your books if you have't processed it through payroll.

    What do you call expensive? And what did they do for you for the fee they charged?

    I personally would never recommend going Ltd to save tax alone, particularly on such low figures, though there are benefits still, especially if you have a spouse/partner/adult children who are not working or are non taxpayers also - there is scope to reduce the overall tax burden significantly. Now that you are a Ltd however I wouldn't glibly suggest going back to sole trader status - don't forget that as a Ltd you have limited liability too, so the debts of the business are not your debts (for the most part).

    The day to day book keeping of a Ltd shouldn't be particularly more onerous for you compared to that of a sole trader, it is only the year end where perhaps you are better using an accountant for ensuring you prepare the accounts in the correct (and current) statutory formats. Obviously payroll is an extra burden, but isn't difficult of time consuming for a single employee, so the "extras" over a sole trader are the tax return (corporation tax + personal self assessment return of course), and the annual confirmation statement for Companies House.

    Directors loan interest relates to a charge the Director can make for any money invested by the Director into the company to enable the company to trade/acquire assets etc.. As it is an unsecured loan the rate of interest could be significant (look at credit cards for example where you can easily be paying 30% interest). To do this there has to be a formal loan agreement in place, with terms of repayment, interest rates etc., and there would also be additional quarterly returns to do to HMRC.

    Regards

    Andrew

  • tomwgftomwgf Member Posts: 11

    ah! no i didnt put it through PAYE payroll. i thought there was no need as it was just for me (as only person in company) and it was for the 11850 allowance. And i couldnt find anything about it in the previous accounts. He charged £75 a month, put the tax return in this February for last year (he said there was less chance of it being looked at) and had put a bonus through for my wife but her tax return had already gone in the summer before so i had to phone up the tax office and get the tax on it paid swiftly.

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 42

    Hi Tom

    Bit of a mess up there then, and yes, a bit pricey too, considering it clearly hasn't been done correctly by them. My standard fee for a one company director for something as small as yours appears to be (assuming your figures are taken from what you have been doing) is £650 (including running the payroll for you!!).

    The only thing you can do if you have not set up PAYE is put a wage through for you that is below the NI threshold as this is the only way you can take a salary without a PAYE scheme in place for your company. If your wife has a job elsewhere then you can't put pay through for her if she is earning above the tax threshold in her other job, unless that is, you have a PAYE scheme in place of course.

    The timing of when your returns are filed does not reduce the window in which HMRC can review your returns (it used to be the case but hasn't been for quite a while now).

    Reading between the lines it seems you may have not have been as well looked after as perhaps you ought to have been.

    Regards

    Andrew

  • tomwgftomwgf Member Posts: 11

    HI andrew
    so if my wage is the threshold (or under) then its OK that i did not put it through a payroll then?
    and then is it still ok to call it wage and count it as an expense for the company?
    My wife (as a director) got a dividend not a wage.
    thank you again for your help. I am thinking about trying another accountant (though if that takes away the difference between being a soletrader... i have company insurance with hiscox, though who knows how much they would actually help if things went pie-shaped)
    tom

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 42

    Hi

    As an accountant myself I would be interested in discussing providing my services to you - as you can see from this chat, you do not need to have me located in your town to be able to do business.

    You would have to enter pay at a rate below the NI threshold to get around not having to run payroll - but your accountant should have known and told you this also. As regards your wife, she can receive dividends provided she is a shareholder - it is only shareholders that can receive dividends. If she has the same shares as you, and in the same number, then the dividend you pay her has to be the same as yours, provided there is enough after tax profits of course, or you can waive yours (this has to be formally documented if you do) but again the after tax profits need to be enough to cover what the dividends would have been without a waiver in place.

    Regards

    Andrew

  • tomwgftomwgf Member Posts: 11

    she is a shareholder but most of the money just goes into our joint account to its actually a bit hard to say if we split the dividend equally, though in the accounts i gave her 5 and me 8k, something like that.
    Thanks for your help. I cant decide what to do at the moment, going back to a sole trader next april seems very tempting, if i do decide i want an accountant i will be in touch.
    thanks again
    tom

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 42

    If you gave her £5k and yourself £8k does that mean that you hold shares in the majority in the company in proportion 8 to 5 so to speak? That is the only way you can do this split if you you are both holding the same type of share. Or do you mean your total drawdown from the company was £13k?

    Regards

  • tomwgftomwgf Member Posts: 11

    had to take a look
    in fact she got 5000 in her tax return and i got 15974 in my tax return
    but most if it (if not all) actually went into our joint account
    so the company dividend was 20974

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 42

    Right, so your £15974 is made up of £11500 salary (for last tax year I mean) and around £4474 of dividend? However you look at this your dividend distribution suggests that your shares in the company are not equal - if you want to private message me to talk in more detail (this is a public forum after all) please do so - to be honest at the moment it sounds like there may have been a bit of a hash made of your returns and accounts.

    Regards

    Andrew

  • tomwgftomwgf Member Posts: 11

    oh definitely messed up - just trying to work out how much (this is the one i did obviously)
    sorry i havent explained myself.
    i got paid officially 11500 wages and 15974 dividend
    wife got £5000 dividend, though actually it was shared i our joint account.
    The 40000 post is because this year my income will have dropped by a third or more

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 42

    Hi

    So to pay yourself a dividend in excess of your wife's dividend suggests that you are at least 3 times as many shares as her in your company. Or does she have a different category of share to you? If you are unsure look at the information in your statutory registers regarding shareholders and the holdings for each - or look on your confirmation statement.

    The £11.5k of pay has to have been subjected to PAYE but as you appear not to have done would suggest you revise and file amended accounts etc to show the lower salary as per earlier note (unless you want to retrospectively register payroll and make late submissions that is, and pay the NI that you have failed to pay).

    To dis incorporate correctly isn't a simple process though not overly complex either, but there are capital gains implications to consider before you proceed, as well as other practical matters as presumably you will have various items/contracts that are in your company name.

    Regards

    Andrew

  • tomwgftomwgf Member Posts: 11

    no - i had no idea dividends had to be equal - we both have equal shares.
    i'll speak to HMRC about the wage - thanks.
    there are no contracts, and capitals gains would imply capital? a couple of grand in the bank and a computer.. the joys of making websites from home.

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 42

    Hi Tom

    I suggest first that you amend your tax returns (personal) to show that the dividends are equal between you, this will probably generate a refund (or tax reduction) for you and create a tax charge for your wife.

    Dividends can only ever be unequal if you have different share categories, or different holdings of the same category, or you have exercised dividend waivers (this latter bit must not be done without advice).

    I should warn you that to register a late PAYE scheme will invariably attract penalty charges (not tax relievable though payable by the company none the less), and interest on late payment of the NIC's, so it may be better to rework your accounts and tax returns perhaps?

    Really sounds like you chose the wrong advisor with your (current?) accountant as all of these things should be dealt with as a matter of course by them for you, so as to prevent you from getting into the tangle you now seem to have found yourself in :(

    Perhaps you should be going back to them, telling them they have made a total mess of it and get them to sort it all out for you gratis, then sack them (in my humble opinion).

    Regards

    Andrew
    myaccounts.co.uk

  • tomwgftomwgf Member Posts: 11

    ok - thanks so much for the advice
    take care
    tom

  • MerlinAccounts_UKMerlinAccounts_UK Member Posts: 42

    You are welcome Tom, glad I have helped (I hope).

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