Questions about Limited Companies

[Ashwood]

I am starting up a Limited Company in order to start a business to get a second income. I already have a PAYE day job, and pay higher rate income tax.

Please could you shed some light on a few things / or tell me if I have got things right

1) Suppose this new business eventually makes £100,000/year profit (!!!) How exactly do I get my hands on this money?

a) There is no point paying myself a salary, because I would have to pay 40% income tax, employee's NI contribution, and employer's NI contribution.

b) My wife is a housewife, so I could pay her upto her personal allowance (£5000 approx) without tax, but then she would have to pay employee's NI, and I would have to pay employer's NI.

c) We've got 3 little kids aged 4, 2, and 1. Could I pay them each a salary upto their personal allowance? Or are they too young to have a salary? They don't have NI numbers, so what about their NI...?

d) I could make myself, my wife, and the 3 kids as shareholders. Pay the 19% corporation tax on the £100,000, then pay each of us dividends. However, will there be an income tax or capital gains tax burden on this?


2) Suppose I voluntarily register my new company for VAT purposes. However, suppose there is NO profit. I.e. I spend, say £10,000 on equipment, materials, advertising etc. but I take only £100 in sales. The business is a failure.

Can I nonetheless send the VAT office a bill for reclaiming the 17.5% VAT on the 10,000 I have spent in the business?

3) How do you decide what the boundary is between private expenses and company expenses? Is it a matter of what you think you can get away with...? For example, I have read (in an e-book about tax avoidance!) that you can go on a foreign holiday and list the cost of your flights, hotel, car hire etc. as a business expense, saying that you went there to meet a contact/client/supplier/business partner/have a business meeting/visit a factory etc. This can then help offset your profits, and reduce your corporation tax burden. You can also claim the 17.5% VAT off your "holiday" expenses!? Is this correct?!?!

Many thanks in advance.

[JamesS]

I can answer the VAT question. You can voluntary register for VAT, you can then claim back VAT on business purchases (if the company you're buying from are VAT registered). But you'll of course need to pay VAT on your sales.

You will have to register for VAT if your turnover reaches or exceeds £61,000 in the tax year.

To pay yourself any money from the business you would be better off doing your own self assessment tax return. You won't pay the 40% tax twice, its 40% on your total income if you're over that threshold.

This is my understanding on dividends: If you're earning under £33,300 and any dividends you receive do not push your total income over £33,300, you'll pay 10% tax on the dividend you receive. If you're earning over £33,300 with or without the dividend, tax on the dividend received will be 32.5%.

If your wife is not currently working it shouldn't be beyond the realm of possibility to use her allowances to receive a salary / dividend. You'll receive the benefit if you have joint bank accounts.

[JamesS]

Re: expenses - If you were genuinely on a business trip then you can claim back all of your personal expenses, travel, hotel, food etc. Get VAT receipts and you can get that back as well.

[Joyous]

Originally Posted by Ashwood

I am starting up a Limited Company in order to start a business to get a second income. I already have a PAYE day job, and pay higher rate income tax.

Please could you shed some light on a few things / or tell me if I have got things right

1) Suppose this new business eventually makes £100,000/year profit (!!!) How exactly do I get my hands on this money?

a) There is no point paying myself a salary, because I would have to pay 40% income tax, employee's NI contribution, and employer's NI contribution.

It's basically salary or dividend. As you know any salary is subject to tax at 40% plus employers and employee's NI. Any dividend will be subject to tax at 32.5% as you're a higher rate tax payer. There's no NI on dividends.

Originally Posted by Ashwood

b) My wife is a housewife, so I could pay her upto her personal allowance (£5000 approx) without tax, but then she would have to pay employee's NI, and I would have to pay employer's NI.

You can pay her up to £5225 per annum without attracting any liability for tax or national insurance.

Originally Posted by Ashwood

c) We've got 3 little kids aged 4, 2, and 1. Could I pay them each a salary upto their personal allowance? Or are they too young to have a salary? They don't have NI numbers, so what about their NI...?

Child labour laws prevent this and the Inland Revenue would attack it in a second.

Originally Posted by Ashwood

d) I could make myself, my wife, and the 3 kids as shareholders. Pay the 19% corporation tax on the £100,000, then pay each of us dividends. However, will there be an income tax or capital gains tax burden on this?

It's possible that this could get caught by the settlements legislation whereby all dividends will be treated as if paid to you and taxed at your marginal rate.

Originally Posted by Ashwood

2) Suppose I voluntarily register my new company for VAT purposes. However, suppose there is NO profit. I.e. I spend, say £10,000 on equipment, materials, advertising etc. but I take only £100 in sales. The business is a failure.

Can I nonetheless send the VAT office a bill for reclaiming the 17.5% VAT on the 10,000 I have spent in the business?

You would reclaim the VAT every quarter when you submit your VAT return. A business loss does not prevent you reclaiming VAT.

Originally Posted by Ashwood

3) How do you decide what the boundary is between private expenses and company expenses? Is it a matter of what you think you can get away with...? For example, I have read (in an e-book about tax avoidance!) that you can go on a foreign holiday and list the cost of your flights, hotel, car hire etc. as a business expense, saying that you went there to meet a contact/client/supplier/business partner/have a business meeting/visit a factory etc. This can then help offset your profits, and reduce your corporation tax burden. You can also claim the 17.5% VAT off your "holiday" expenses!? Is this correct?!?!

I'd like to read the book that told you this. The trip would be disallowed as there's duality of purpose. People would be putting their whole lives through their books otherwise. If while you were on holiday, you booked a flight to meet a business associate to do business, that trip would be allowable, but the holiday - no. The split between business and private expenditure is largely common sense. If it's wholly and exclusively for business purposes then claim it. If in doubt speak to your accountant.

Originally Posted by Ashwood

Many thanks in advance.

You're welcome.

Regards

Joy

[bwglaw]

Originally Posted by Ashwood

We've got 3 little kids aged 4, 2, and 1. Could I pay them each a salary upto their personal allowance? Or are they too young to have a salary? They don't have NI numbers, so what about their NI...?

The Children and Young Persons Act makes it an offence to employ someone under the ages set out in the Act. Your Local Authority can issue proceedings against you.