Fairly regularly we get clients approach us to ask if they should become a Limited Company, it seems to be one of those things people’s friends regularly suggest.
We all have a rough idea what a company is, I’m sure but what does it actually mean when it comes down to it?
A Limited company is a “separate legal person” it exists independently of it’s shareholders and directors and can enter into contracts in it’s own right. One of the advantages of a company is “Limited Liability” which means essentially that creditors can only take the assets of the company not the assets of the owners (shareholders) – in most circumstances – if the company was insolvent.
Most of our clients are small businesses, that’s the nature of the fitness industry. There are circumstances where a company is absolutely the right plan (running a gym for example, or if your tax affairs are more complicated due to higher rate tax bills) but in a lot of cases there is a fair amount of hassle and if you don’t get it right you can end up paying more tax than you need to.
A lot of people are unaware that when they set up a company that when they take money out of it that they have to either declare a dividend or put money through a payroll – yes you actually have to run a payroll every month and give yourself a payslip and file this with HMRC.
This is crucial if you have no earnings outside of the company as otherwise you will lost the benefit of your personal tax and national insurance allowances and the company will pay more tax than it needs to.
Lets look at an example, based on a few situations that I’ve seen:
You set up a company and it makes a profit of £8,000 you don’t realise that you need to set up a payroll. The company would pay tax on that at 19% giving a tax bill of £1,520.
If you had run a payroll there would be no tax to pay as your salary (say £8,000 also) is tax deductible for the company and below your personal tax allowance so you wont owe any tax.
If you then go further and take out the money that is left after the Corporation Tax (£6,480) then £4,480 would be taxed as a dividend at 7.5% (you get £2k tax free) giving additional tax of £336.
So this one simple mistake has cost you £1,856
Setting up a payroll scheme isn’t hard but it’s something nobody seems to think of.
We don’t expect you to know all this. If you have a limited company or are wanting advice on whether it is right for you then drop us an email or a message.