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Business Challenges

Tax Efficient Setup

Are you thinking of incorporating, but not sure if it would be more tax-efficient to do so?

The tax rules can be complex and not easy to understand when you are not an accountant.

This is where we come in, assess your situation advise it is more tax-efficient to incorporate your business as a limited company or remain sole trader.

Inside row boat

Frequently Asked Questions

  1. Pay As You Earn - the salary system. To do this, you will need to register with the HMRC and you might have to pay Income Tax and National Insurance contributions, depending on your income level. The optimal salary in 2021/22 is the lower threshold of £9,568 per year. This salary will also give you the right to future pension and state benefits.
  2. Dividends - are exempt from tax up to £2,000. Any amount above this amount and up to £37,699 is taxed at 8.75% (7.5% + 1.25%), from April 2022. By taking a combination of a low salary and higher dividend payments, you could pay a significantly lower personal fee than if you were self-employed and you would really see the benefit of working as a Director in your own company.
  3. You should also take into consideration the 19% Corporation tax which is payable on your profits, 9 months and 1 day after the end of the financial year.
    This means that in total you will pay 27.75% (8.75% on dividends + 19% corporation tax), which is once more beneficial than being Self-Employed where you could pay a minimum of 32%
  4. Lastly, you can contribute to a pension and get 100% tax relief as an allowable expense. Your contributions are tax-free as long as the amount falls under the annual allowance of £40,000 (2020/21 tax year).

Pension decisions are often complicated and require careful consideration. We recommend speaking with a financial advisor for personalised advice before you make any contributions.

  1. Take out more than you are allowed to do so.
    • Borrowing by directors is permitted. Limits are set by the Companies Act 2006, but there are tax costs.
    • If you borrow money from the company or take out more than you should and do not repay the loan within nine months of the year-end, the company will pay a tax charge of 32.5%.
  2. Additional costs and work involved.
    • All limited company structure comes with more reporting requirements and the directors of the company have a wide range of duties and fiduciary responsibilities, which can, in turn, create additional costs and paperwork.
    • For example, as a director of a limited company, you must register the business with HMRC and are legally required to set up a separate company bank account. Accounts must be prepared each year and submitted to HMRC – and they may need to be audited. This offers less privacy, as these accounts are publicly available to everyone online via Companies House, along with your details and those of any other directors.
  3. You will also incur additional costs for running a limited company and your accountancy fees will increase due to additional reporting requirements.
    But there are other benefits by paying for an accountant such as:
    • Claiming for additional eligible business expenses which you might be entitled to but you are not aware of.
    • More accurate returns and paying the correct amount of tax.
    • And more importantly, not spending time on bookkeeping and filling returns, but doing things you love.

We can run a cost analysis to determine if is more beneficial to incur more costs and pay less tax.

If you are looking to apply for a mortgage you must plan ahead wherever possible. Why because typically lenders will loan between 4.5 to 5 times the individual’s income.

Ideally, you should aim to minimise your costs, maximise dividend take and ensure that your plans must be brought into action at least two or three years before the intended date of the mortgage application.

Also, some lenders will pay close attention to a company’s balance sheet to ensure the company is solvent; if the company owes more than it owns, a mortgage lender is likely to view this as high risk.

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