FitnessTaxReturns
10-15-2011, 01:33 PM
One of those short questions I often get asked, but sadly, equally often generates a very long answer. The short answer is, yes, no or maybe!
There are many issues to consider, but clients seem to focus on the tax aspect, which is important of course. Before any decision is made, you have to look outside the tax implications as well.
Its a good idea to establish the difference between being self employed and running a limited company. When self employed, there is no difference between you and the business, in other words, you are the business i.e. John Smith Trading as John's Fitness makes no difference Mr Smith is the business and is known as a legal entity or being. A self employed business is taxed on the profits that business makes, and not what the owner draws out for his or her personal use. If the business makes £20,000 profits and the owner draws, say, £15,000 for their own use, the HMRC will tax the £20,000 and not the £15,000. The reasoning being that the £20,000 has been generated by the business and whether it is saved or spent is up to you.
Limited companies are totally different. A main problem arises when a self employed person transfers his business to a limited company but still runs it on a self-employed basis. The main difference is that the company is a separate legal entity or being to that of the owner. If you own a limited company, then you may own all the shares at the start, but the company is still a separate legal being. In other words, a limited company is identified as a separate legal being in the eyes of the law, as you are I are also legal beings, and can sue and be sued.
Although you may own shares in your company, to run it you may be a director, which is an employee of that company. And as with any employees of a company, your drawings, will now be a salary and should go through the PAYE system. What you have to consider that any money drawn from a company for your own use has tax implications, unlike that drawn if you were self employed. Generally, money drawn from a limited company mainly goes through the PAYE system, or is paid via dividends. These are two of the more established methods, but there are a number of other ways, too detailed to go through here.
Limited companies are charged corporation tax on the profits it makes after deducting any salary paid to its owners through PAYE. Dont forget that the salary then subject to income tax and national insurance so there is no escape.
It can be good idea for a self-employed person to operate through a limited company if your profits are quite large. If your profits move you into the higher rates of tax, is 40% or even 50%, then trading through limited company where the corporation rate of tax is currently 20% and can have an attraction.
However, if you plan to draw all the company profits out for your own use, then the PAYE system may hit you at the higher rates of tax still, and may even cost more than being self-employed! Also beware that the costs of operating a limited company can outweigh the tax benefits.
In summary
Each business is different and some accountants also have differing views, but in my experience over the past 20 years or so, lead me to suggest the following may be trigger points in trading through a limited company:
Your self employed profits are in the higher rate tax band
You wish to build up assets in the business, thereby reinvest profits in the business and not draw them all out for personal consumption.
You are taking on more staff, responsibilities
Your customers prefer dealing with limited companies
Status of having a limited company!
But beware of the pitfalls:
Without careful tax planning, you may end up paying more in tax overall than if you remained self employed
You will be required to have a limited company bank account you cannot really use your existing personal one. (Remember a limited company is a separate legal being from you)
Can you deal with the considerable additional administration?
Accounts have to be filed at Companies House each year and therefore available for public inspection.
Accountants fees will increase significantly
PAYE will need to be operated for your own salary
The HMRC take a very dim view if it is proved that the sole purpose of the limited company was to save tax and they can undo any tax savings!
As you can see, the whole subject of operating through a limited company is complex and professional advice is essential before you make any decision.
www.fitnesstaxreturns.co.uk
Mobile:07856 768 748
There are many issues to consider, but clients seem to focus on the tax aspect, which is important of course. Before any decision is made, you have to look outside the tax implications as well.
Its a good idea to establish the difference between being self employed and running a limited company. When self employed, there is no difference between you and the business, in other words, you are the business i.e. John Smith Trading as John's Fitness makes no difference Mr Smith is the business and is known as a legal entity or being. A self employed business is taxed on the profits that business makes, and not what the owner draws out for his or her personal use. If the business makes £20,000 profits and the owner draws, say, £15,000 for their own use, the HMRC will tax the £20,000 and not the £15,000. The reasoning being that the £20,000 has been generated by the business and whether it is saved or spent is up to you.
Limited companies are totally different. A main problem arises when a self employed person transfers his business to a limited company but still runs it on a self-employed basis. The main difference is that the company is a separate legal entity or being to that of the owner. If you own a limited company, then you may own all the shares at the start, but the company is still a separate legal being. In other words, a limited company is identified as a separate legal being in the eyes of the law, as you are I are also legal beings, and can sue and be sued.
Although you may own shares in your company, to run it you may be a director, which is an employee of that company. And as with any employees of a company, your drawings, will now be a salary and should go through the PAYE system. What you have to consider that any money drawn from a company for your own use has tax implications, unlike that drawn if you were self employed. Generally, money drawn from a limited company mainly goes through the PAYE system, or is paid via dividends. These are two of the more established methods, but there are a number of other ways, too detailed to go through here.
Limited companies are charged corporation tax on the profits it makes after deducting any salary paid to its owners through PAYE. Dont forget that the salary then subject to income tax and national insurance so there is no escape.
It can be good idea for a self-employed person to operate through a limited company if your profits are quite large. If your profits move you into the higher rates of tax, is 40% or even 50%, then trading through limited company where the corporation rate of tax is currently 20% and can have an attraction.
However, if you plan to draw all the company profits out for your own use, then the PAYE system may hit you at the higher rates of tax still, and may even cost more than being self-employed! Also beware that the costs of operating a limited company can outweigh the tax benefits.
In summary
Each business is different and some accountants also have differing views, but in my experience over the past 20 years or so, lead me to suggest the following may be trigger points in trading through a limited company:
Your self employed profits are in the higher rate tax band
You wish to build up assets in the business, thereby reinvest profits in the business and not draw them all out for personal consumption.
You are taking on more staff, responsibilities
Your customers prefer dealing with limited companies
Status of having a limited company!
But beware of the pitfalls:
Without careful tax planning, you may end up paying more in tax overall than if you remained self employed
You will be required to have a limited company bank account you cannot really use your existing personal one. (Remember a limited company is a separate legal being from you)
Can you deal with the considerable additional administration?
Accounts have to be filed at Companies House each year and therefore available for public inspection.
Accountants fees will increase significantly
PAYE will need to be operated for your own salary
The HMRC take a very dim view if it is proved that the sole purpose of the limited company was to save tax and they can undo any tax savings!
As you can see, the whole subject of operating through a limited company is complex and professional advice is essential before you make any decision.
www.fitnesstaxreturns.co.uk
Mobile:07856 768 748