Forming a limited company – London Accountants for Limited Companies
Forming a limited company may be a consideration if the limitation of liability is important, but it should be noted that banks and other creditors often require personal guarantees from directors for company borrowings.
Trading through a limited company can be an effective way of sheltering profits. Profits paid out in the form of salaries, bonuses or dividends may be liable to top tax rates, whereas profits retained in the company will be taxed at 19%.
Funds retained by the company can be used to buy equipment or to provide for pensions – both of which can be eligible for tax relief. They could be used to fund dividends when profits are scarce (spreading income into years when you might be liable to a lower rate of income tax) or capitalised and potentially taxed at 10% and/or 20% on a liquidation or sale.
National insurance contributions (NICs)
Leaving profits in the company may be tax-efficient, but you will of course need money to live on, so you should consider the best ways to extract profits from your business.
A salary will meet most of your needs, but you should not overlook the use of benefits, which could save income tax and could also result in a lower NIC liability.
Five key NIC-saving strategies by London’s Accountants
1. Increasing the amount the employer contributes to company pension schemes. Care should be taken however as there are limits on the amount of pension contributions an individual can make both annually and over their lifetime
2. Share incentive plans (shares bought out of pre-tax and pre-NIC income)
3. For some companies, disincorporation and instead operating as a sole trader or partnership may be beneficial
4. Instead of an increased salary, paying a bonus to reduce employee (not director) contributions
5. Paying dividends instead of bonuses to owner-directors.
Increasing your net income as an owner-director
As an example, consider how much you might save if, as an owner-director, you wanted to extract £10,000 profit (pre-tax) your company makes in 2018/19 by way of a dividend rather than a bonus. We have assumed in this scenario that the director has already taken salary in excess of the upper earnings limit for NIC, is a 40% taxpayer, and the £2,000 dividend tax allowance has already been utilised.
Remember that dividends are usually payable to all shareholders and are not earnings for pension contributions and certain other purposes. It is possible to waive dividends, although this can result in tax complications. Finally, you need to consider with us the effect of regular dividend payments on the valuation of shares in your company.
Planning for the year end from Small Business London Accountants
Tax and financial planning should be undertaken before the end of your business year, rather than left until the end of the tax or financial year. Some of the issues to consider include:
• the impact that accelerating expenditure into the current financial year, or deferring it into the next, might have on your tax position and financial results
• making additional pension contributions or reviewing your pension arrangements
• how you might take profits from your business at the smallest tax cost, and how the timing of payment of dividends and bonuses can reduce or defer tax
• improvements to your billing systems and record keeping system, or a general review of your current systems to improve profitability and cash flow
• national insurance efficiency and employee remuneration.
Minimising the risk of late filing penalties
It is important to keep your personal tax affairs in order so that you avoid incurring any Tax Return late filing penalties. The cut-off dates are shown in the calendar, but the current penalties are:
Missed filing deadline – £100
Return 3 months late An additional £10 for each following day up to 90 days
Return 6 months late Add £300 or 5% of the tax due, if greater
Return one year late Add £300 or 5% of the tax due*, if greater
*In more serious cases, this penalty may be increased to 100% of the tax due.
The timetable for making tax payments is relatively straightforward for the self-employed:
• 31 January in the tax year, first payment on account
• 31 July after the tax year, second payment on account
• 31 January after the tax year, balancing payment.
Again, a system of interest and penalties applies. For example, if any balance of tax due for 2017/18 is not paid within 30 days after 31 January 2019, HMRC will add a 5% late payment penalty as well as the interest that will be charged from 1 February 2019.
A further 5% penalty will be added to any 2017/18 tax unpaid after 31 July 2019, with a final 5% penalty added to any 2017/18 tax still unpaid after 31 January 2020. Interest is also charged on outstanding penalties, as well as on unpaid tax and NICs.
If your business is incorporated, it will be liable to corporation tax. Corporation tax is usually payable nine months and one day after the end of the company’s accounting period.
If there are cash flow issues, HMRC might be persuaded to accept a spreading of your next business tax payment – you will have to pay interest at the HMRC rate, but keep to the agreed schedule and late payment penalties will be waived. Arrangements need to be put in place before the due date for paying the tax, so talk to us in good time if you wish to apply.
What is a Payments on account?
Payments on account are normally equal to 50% of the previous year’s net liability. A claim can be made to reduce your payments on account, if appropriate, although interest will be charged if your actual liability is more than the reduced amount paid on account.
There is no equivalent mechanism to make increased payments on account when the year’s tax will be higher, so you should ensure that you build a reserve of money to pay the balance of tax due. Don’t wait until it’s too late if you have difficulties! Please tell us in good time about any issues facing your business, as we may be able to offer solutions.
Payments on account are not due where the relevant amount is less than £1,000 or if more than 80% of the total tax liability is met by income tax deducted at source. In these cases, the balance of tax due for the year, including capital gains tax, is payable on the 31 January following the end of the tax year.
George is self-employed. His accounts are made up to 31 August each year. When we prepare the 2018 Return we will be including his profit for the year ended 31 August 2017, and that is the profit which will be taxed for 2017/18.
George’s payments on account for 2018/19 will automatically be based on the 2017/18 liability.
Providing we know that George’s profits for the year to 31 August 2018 are significantly less than the previous year, we can examine the figures, perhaps even prepare the annual accounts and, taking into account any other sources of taxable income, make a claim to reduce George’s 2018/19 payments on account, easing his cash flow by reducing the tax payments due in January and July 2019.
Your next steps: contact us to discuss…
• Starting up a new business
• Raising finance for your venture
• Timing capital and revenue expenditure to maximum tax advantage
• Minimising employer and employee NIC costs
• Improving profitability and developing a plan for tax-efficient profit extraction
If you have a Limited company or planning to setup a limited company and looking for a clever accountants in London, get in touch with us.