Limited Company

Limited Company

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Hello Can someone offer a second opinion on a individual who set up a limited company to trade his business. He is a first aid trainer and pays himself through Paye. Would you say this is best practice rather than paying himself a dividend/drawings. As if he pays himself through PAYE he is paying tax on his gross earnings and then paying tax on his profit Corporation tax. What would be the best tax efficient way please thank you

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Euan's picture
By Euan MacLennan
20th Sep 2013 14:35

Standard method

... is to pay himself no more salary than £641 a month (on which no NIC will be payable, but will still maintain his entitlement to the state pension, and no tax will be payable unless he has another job), pay corporation tax at 20% of the resulting profit and then, pay himself dividends (on which no NIC are payable and no tax unless he is a higher rate taxpayer) out of the profits after tax.

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Replying to Matrix:
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By ABPS
03rd Oct 2013 09:52

Hello thank you for your response and I appreciate your feed back. just one matter when you mention £641.00 per month on which no NIC and tax is applicable. Could you confirm I tax year 2011-12 the monthly amount and also the same 2012-13 as I am assuming £641.00 per month is for this tax year 2013-14?? I have been on HMRC website to confirm the amounts but all I seem to get notification is directors national insurance. thank you in advance for your help.

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By johngroganjga
03rd Oct 2013 10:15

Yes £641 is the 2013/2014

Yes £641 is the 2013/2014 figure.  The figures in the two preceding years were slightly lower.  Why do you need the figures for previous years?

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Replying to lionofludesch:
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By ABPS
03rd Oct 2013 10:30

Hello John this person was drawing money from the business which was incorporated on 5/1/12 so the statutory accounts are for the period 5/1-31/12/12 the owner was drawing money out from the business as directors loans so during 5/1-5/4/12 would be at ex amount per week and then the period 6/4-31/12/12 would be at ex amount per week which as you state is lower than the current rate £641.00 per week. What I need to do is strip out is monthly entitlement for the period 5/1-31/12 from his directors loan accounts and post to salaries/wages. He never enrolled for paye?? so I will need to disclose his paye earnings for this period. in addition he has drawn more than his yearly allowance which have been posted again to directors loan account but I will need to treat thses amounts as dividend payments going forward as this will be his first corporation tax return which again he never completed a CT603 to register. In addition he uses a room in his house to run his limited business so he can claim a contribution against utilities and council tax but these amounts have been paid from his personal bank account. Would it be sensible to work out the contribution and debit the P&L with this amount but where would the credit entry go?? He uses a bookkeeper to post up entires using sage 50 so I will need to journal these corrections to his accounts before we do a tax return.

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By johngroganjga
03rd Oct 2013 11:15

The 2011/2012 and 2012/2013 amounts were £589 and £624 respectively.

I don't think you can treat payments during the first accounting period as dividends retrospectively.  They will have to be debited to his loan account.  You can vote a dividend now (assuming that there are profits to cover it) that will eliminate any s455 liability (if, as I assume, you are preparing accounts up to 31 January 2013 or later).

The credit for the charge for the use of his home goes to his loan account.

You must be up against it time-wise.  The filing deadline for a company incorporated on 5 January 2012 is the day after tomorrow!  Good luck.

 

 

 

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Replying to 356B:
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By ABPS
03rd Oct 2013 11:08

Thanks very much John for your feed back.

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Euan's picture
By Euan MacLennan
03rd Oct 2013 14:24

Re-writing history

You seem to be prepared to do a lot of re-writing history, so you might as well treat some of the payments as dividends while you are at it - assuming, of course, that the accounts show sufficient profits after tax to cover whatever you decide to treat as dividends.

The standard advice to pay a salary up to the level of the NI threshold in order to get a qualifying year for the state pension without paying any NI contributions is dependent on filing PAYE returns for the tax year - forms P35 & P14 up to 2012/13 and monthly RTI reports from 2013/14 onwards.  You cannot do this without a PAYE scheme.  It is a legal requirement to apply for a PAYE scheme if you pay more than the NI Lower Earnings Limit of £5,668 in 2013/14 (£5,564 in 2012/13 and £5,304 in 2011/12).  As your client has not registered for PAYE, you had better restrict the amounts you allocate to salary to the NI LEL.

@John

I think you are wrong about the filing date for the accounts.  The rule in s.442(3) CA 2006 of 12 + 9 months only applies where the first accounting period is longer than 12 months, which would have been the case if someone had not brought forward the accounting date for this company from 31/01/13 to 31/12/12.  As the first accounting period from 05/01/12 to 31/12/12 is now less than 12 months, the filing date is the standard + 9 months, so the accounts should have been filed by Monday, 30/09/13, and are now overdue.

 

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Replying to vishal23:
By johngroganjga
03rd Oct 2013 14:36

Latest possible filing date

Euan MacLennan wrote:

@John

I think you are wrong about the filing date for the accounts.  The rule in s.442(3) CA 2006 of 12 + 9 months only applies where the first accounting period is longer than 12 months, which would have been the case if someone had not brought forward the accounting date for this company from 31/01/13 to 31/12/12.  As the first accounting period from 05/01/12 to 31/12/12 is now less than 12 months, the filing date is the standard + 9 months, so the accounts should have been filed by Monday, 30/09/13, and are now overdue.

 

You are right.  I hadn't spotted that 1st accounts were being done to 31 December, and so first period had been shortened.  I assumed, as I said in one of my posts, that the accounts would be being prepared up to the default date of 31 January (assuming no lengthening or shortening).  The other point is that a dividend voted now is too late to save s455 tax.

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