Limited Company Guide

Incorporation – The Advantages

There are a number of potential advantages to using a Limited Company structure. Where a number of business proprietors are involved many people find it easier to regulate their business relationship through a limited company rather than a partnership arrangement. A business interest represented by shares can be transferred simply and can make succession tax planning easier if it is intended to transfer a partial interest in the business to other members of the family. Limited liability in itself is an important consideration, however, that aside many individuals like the perceived status that goes with trading as a limited company rather than trading under their own name as a sole trader or partnership. These reasons aside a primary reason for incorporation of a small business always has been driven by the possibility of saving tax and national insurance contributions.

Choosing to operate as a limited company means that you will have an increased compliance burden against the simplicity of operating as a sole trader, you will need to ensure that you consider and carefully implement the following issues;

Recording and Safely Retaining Transactions

It is essential that you choose an appropriate method of recording all of the company transactions, such as, invoices, business expenditure, capital expenditure, VAT records, PAYE records and payments received and made. Usually using a simple spreadsheet will ensure that your records comply and that your accountant can easily reconcile your accounting transactions at the year end. (Personal Service Company clients using Primus Accountancy services have the option of exclusive access to their own secure web portal, which contains a simplified cashbook for recording and saving your company transactions). There are also numerous bookkeeping software packages that you may opt to use.

Business records should be retained for a period of no less than six years. We recommend that you should properly retain original contracts, invoices, receipts, VAT and PAYE paperwork in an appropriate filed indexing system. Should you require any advice regarding how to set up such a system please do not hesitate to contact us.

Company Payroll

Once you have chosen to operate through a limited company your company will need to register a Pay As You Earn scheme (PAYE). All transactions relating to payments in the form of salary should be registered under the PAYE scheme and appropriate income tax, employees and employers national insurance properly recorded, deducted and paid over to HM Revenue & Customs from such payments.

Payrolls are usually operated weekly, fortnightly or monthly although you can also operate a less frequent system if this fits into your business model. As an officer of the company you will normally take a salary from the company irrespective of whether you are operating under IR35. You will need to ensure that payslips are prepared in line with your chosen payment frequency and that the necessary tax and national insurance are paid to HM Revenue & Customs by the 19th of the following month after the salary payment has been made.

Under the RTI, regulating employer submissions should be made to HMRC in line with the payment frequency of the payroll.

PA offer a full payroll package to our clients as part of our services under our fixed fee package, this includes presenting you with payroll reports in line with your chosen payroll frequency highlighting the dates and amounts of tax and national insurance payable to HM Revenue & Customs. We will also handle all the company’s RTI compliance requirements. This service ensures that you don’t have to purchase payroll software and worry about undertaking regular detailed PAYE calculations.

Expenses, Benefits and End of Year Reporting

Normally any expenses paid to employees or officers of a limited company need to be reported on an end of year benefits and expenses form (P11D). P11D’s should be submitted to HM Revenue & Customs no later than 6th July following the end of the associated tax year.

Certain expenses paid for by the company on behalf of the employee/officer may be classed as benefits. Benefits paid to employees/officers of a company are liable to an income tax charge on the individual and a special national insurance charge (Class 1ANIC) is applied and payable by the company on most benefits.

For more information on expenses and benefits please visit or expenses and benefits section, or contact us.

Companies House

Any changes to the constitution of the company (director changes, secretary changes, registered office changes, mortgage charges against the company) need to be detailed and logged on specific forms designed by Companies House and submitted to them. These can also be filed electronically. Each year Companies House require the company to complete an annual return to complete. The annual return will need to be delivered electronically along with a payment made to them for £15. If you require any further information regarding Companies House issues please feel free to contact us.

As part of our fixed fee package Primus Accountacy will undertake this work on your behalf.

Dividend Planning

If you have taken professional advice and you are operating outside the scope of the IR35 legislation, then it is likely that the most tax efficient method of drawing income in excess of your salary from your company will be by way of dividends. Before dividends are drawn from the company it is essential that your company has adequate profits to sustain the payment. If you draw dividends in excess of your retained profits HM Revenue & Customs may treat the excess as salary on which PAYE tax and national insurance would be due. You should carefully check your company accounts to see whether your company has reserves brought forward, these are profits that haven’t been paid out. In the absence of any other creditors these amounts can be used to pay a dividend as well as profits made in the current financial year. Drawing income in excess of the maximum net profit available within the company can lead to serious problems later in the year. Directors often end up owing the company significant sums of money due to not carefully ensuring that they do not exceed the maximum drawings for the year.

Each time that a dividend payment has been made to a shareholder it is essential that the correct procedures are adopted and the correct records kept. It is vital that that each time a dividend is taken the necessary board minutes of the meeting voting the dividend are drawn up and retained with your company records, along with a dividend voucher detailing the amount of the payment.

How much tax will I pay personally on dividend amounts?

There is no personal income tax to pay on dividends you receive if your TOTAL INCOME (eg, salary, bank interest, property income, other dividends + dividends voted) is within the basic rate tax bands (BRB). So clearly there is an advantage if you can keep your income within this limit. But exactly how much is this?

From April 2014 the BRB is £31,865. In addition there is also a tax free “personal allowance” (PA) of £10,000 So the limit is calculated as follows;

Personal Allowance £10,000
Add: Basic Rate Band £31,865
Total £41,865

So if your income, before tax, is £41,865 or below, any dividends included within it will not be liable to further tax. However, remember that dividends are treated as paid net of 10% tax (called tax credit). You must therefore, add this onto the dividends you receive when working out your total income, eg. Adividend of £900 equals gross income of £1,000. That is, £1,000 less a tax credit of 10% = £100, equates to the net dividend of £900.

Personal Service Company clients can easily keep track of their maximum net profit figures on a month by month basis by using their exclusive simplified cash book within their secure web portal area. The area also offers automated dividend vouchers and minutes of meetings once you have decided the amount of dividend you will pay to the shareholders of the company. For more information please contact us.

Accounts

The company will be required to submit accounts to HM Revenue & Customs and Companies House each year. Penalties arise for late filing and it is important that you ensure that the documents are prepared in due time. Where instructed Primus Accountancy will prepare the documents by the due dates and forward the accounts for your approval and signature prior to filing them.

Accounts and accompanying corporate tax return (CT600) are due with HM Revenue & Customs 12 months after the end of the financial accounting year end (there are slightly different rules if a company’s accounting period end is greater than 18 months please contact us for details).

IR35

Each and every time that you accept new or revised contract terms it is essential that you consider the IR35 implications of the changes. If you are not already familiar with IR35 you should read our guide to IR35 so that you can follow the requirements within the framework to help you decide whether or not you will choose to work within it.

You should seek proper professional advice for each contract that you work on and ensure that the chosen professional undertakes a full and thorough review of your circumstances. You may wish to consider the review options that we have carefully chosen to market on our website, where each contract is reviewed by employment tax experts – IR35 review packages.

VAT

If your company turnover exceeds the VAT registration threshold (currently £79,000 per year) then you will be required to register and account for VAT. If you are registered for VAT you should add 20% VAT onto any invoices sent to your clients.

Every three months (the exact dates will depend upon your VAT quarter) you must complete a VAT return and send your quarterly VAT payment to HM Revenue & Customs.

If you are Standard rated for VAT you pay 20% VAT after you have reclaimed the VAT on your purchases. However, it may be beneficial to opt to use the Flat Rate VAT scheme, this scheme allows you to pay over a reduced amount of VAT to HM Revenue & Customs. If you would like more information on The Flat Rate VAT Scheme please do not hesitate to contact us.

Personal Tax Returns – Self Assessment

As the director of a limited company you will have to complete a Self Assessment Tax Return. HM Revenue & Customs usually send the tax return forms out to individuals in April. Primus Accountancy can complete these returns on your behalf, please contact us for further information.