payroll requirements and tax benefits for company directors

payroll requirements and tax benefits for...

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I am thinking of converting from being a sole trader to a limited company primarily to save tax.

I would be the sole director and would anticipate paying myself a limited salary up to the National Insurance threshold, of either the lower earnings limit or the primary theshold to mimimise any company national insurance payments, the balance of my earnings would be payable by share dividend.  If i am paid at the lower NI limits referred to above would i still have to do and send monthly and yearly payroll returns to HMRC and would i have to register with them as this could be quite onerous? Also are there any advantages or disadvantages of choosing either the lower NI earnings limit or the NI primary threshold as a limit to my pay?

Many thanks

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By twickers
16th Aug 2011 18:28

Sole trader to ltd status

You give a poor reason for your intentions ?. Stop listening to glib advice and talk to someone with your interest in mind. There are a host of question you should answer/ such as 
level of gross income generated / what trade are you in/do you have a pension setup/ are you married or single/ if married is the relationship trustworthy(you may need to have partner as shareholder to enhance the div benefit)/ do you have other income source.

As to your question if you pay a salary you need a payroll setup/
The purpose  of paying within NHI thresholds is to protect your state pension and use the 
personal allowance.

Ltd structure may be subject to IR35 and Cis rules/ requires forms completion/ filing deadlines and penalties. any profit left after max 
dividend cannot be used for your own purpose unlike your present status as sole trader/ 

 

 

 

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By The Doctor
16th Aug 2011 19:59

Agree
I agree with twickers - there is no substitute for professional advice and don't attempt this by yourself - there are lots of pitfalls if done wrong!

Re your specific points

- you only make an annual return for payroll - but you would need to tell hmrc that there is nothing to pay each month (or quarterly if you request this) this presumes that you have no adjustments to your coding notice and don't employ anyone. It is most tax efficient to pay at the employee primary threshold, as although there will be a little ni to pay, it will say you a few quid in Corporation tax.

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Euan's picture
By Euan MacLennan
17th Aug 2011 10:42

Minimal salary

Whilst I agree that there is more to consider about changing to a limited company than just tax savings, the normal advice is for a company to pay a salary at or just under the secondary NI threshold (above which the employer starts paying NIC) - currently £589 a month or £7,072 a year in 2011/12.  Assuming that it is your main job, you would also pay no employee's NIC (primary threshold of £602 a month, £7,225 a year) or income tax (PAYE threshold of £623 a month, £7,475 a year).  However, you will need to set up a PAYE scheme, file a nil PAYE "payslip" online each quarter (less hassle than working out real NIC and paying it) and submit forms P35 & P14 online at the end of the tax year.  It is the P14 which proves that you have paid a salary of more than the NI Lower Earnings Limit (£442 a month, £5,304 a year) and are therefore entitled to be credited with free NIC so that your entitlement to the state pension benefits and other benefits is maintained.

The main tax advantage of trading through a limited company, paying yourself a minimal salary as above and taking dividends out of the company's profits after tax is not so much tax, but the fact that you pay no NI contributions, which you would be doing as a self-employed person.

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