Starting up in business as a limited company has many benefits, including tax advantages and reduced risk. This article will give you a broader understanding of limited companies and your responsibilities when setting one up.
A limited (or limited liability) company is a structure that you can use to run your business - it’s responsible in its own right for everything it does and its finances are separate to your personal finances.
As a separate legal entity it can enter into contracts in its own name. Business dealings are made on behalf of the company, rather than the owners. Its owners are protected by limited liability. This means they are only responsible for business debts up to the value of the amount they invested.
Any profit it makes is owned by the company, after it pays Corporation Tax. The company can pay out its profits (after tax) to its shareholders in the form of dividends.
The company must have at least one director to manage the business and a company secretary to make sure all the rules are followed and official records maintained.
The advantages of setting up a limited company are:
This video explains the benefits of trading as a limited company, explaining the differences between sole traders and limited companies and the various ways that a limited company can protect small business owners and inspire confidence in their businesses.
As a director of a limited company, you can take money from the company in three ways:
A new dividend regime came into effect from April 2016 in the UK. Under the new regime, everyone will be entitled to a £5,000 dividend allowance which means the first £5,000 of taxable dividends will be taxed at 0%. From April 6 2017, this allowance drops to £2000.
Any dividends in excess of this will be taxable at new rates.
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Dividends are not allowable expenses and so the company does not get relief on them.
Certain expenses are allowable to the business such as salaries paid to the directors and benefits paid by the company to the director but there will be tax issues and national insurance considerations here.
Certain benefits / expenses
The following benefits also apply.
It depends on how you require your funds. If you take a salary through your company this will be treated as normal income, and the usual 20%, 40% and 45% tax rates will apply. If you make pension contributions from the company into the director’s personal pension, then this will be an allowable expense to the company and will not be taxed on the director until he starts to draw on it, so many directors see this as an attractive option.
Salary, benefits and rental income are all treated as non-savings income and will be taxed first using the normal income tax rates. Interest will be taxed next. There is a potential to tax £5,000 of interest at 0%. There are conditions here and you should speak to a professional to see if you are eligible for this 0% rate.
In terms of dividends, from April 2017, the first £2,000 of dividends are tax free with the remainder being taxed at 7.5%, 32.5 or 38.1% where dividends fall in the basic, higher or additional thresholds.
As a director of a limited company, you must:
You can hire other people to manage some of these things day-to-day (e.g an accountant) but you’re still legally responsible for your company’s records, accounts and performance. You need to ensure you are organised. There are penalties for failure to submit corporate tax returns and accounts. You also need to ensure you keep all of your paperwork such as dividend vouchers.
Company accounts are complicated, it's best to work with an accountant. Usually accountants will quote you an annual fee which includes all the company regulatory and compliance work and your personal tax returns too.
Although the directors of a limited company are not normally held liable for the debts of the company, frequently the courts on behalf of the creditors can deem one or more of the directors liable for the company's debts during a formal insolvency procedure. The rules are complex here and professional advice is recommended.
Part of the process of setting up your limited company is registering your business with Companies House. Here we give you a guide to the process.Read more
When it comes to directors making National Insurance contributions, different rules apply to that of sole traders. This article looks at the National Insurance obligations of a director of his/her own company and will consider both the liabilities of the director and the liabilities of the company (the employer) itself.Read more
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