New to contracting, how to avoid Limited company tax and some more questions?

[diddly]

Hi,

I've started trading this year as a limited company. Currently I'm taking a small salary and pay national insurance etc. and the rest I get paid in dividends.
Now the dividends payout is if I understand correctly in the region of £34.000 a year.
Let's say I earn £50K a year, how can I escape paying 40% corporation tax over the £16K difference?
I hear that after two years of having the money in the company bank account that you have to pay only 10% tax. Is that right, or do I, in order to be eligible to pay only 10% tax, have to cease trading?
In that case, can I set up after ceasing trading a new Ltd company on the same address with the same director and secretary?

Can I escape paying 40% tax over the £15K by setting up a company pension plan or SIPP?

What expenses can I deduct from my taxed income and is there a limit to these expenses? I work from home sometimes. Can I offset electricity/gas/meals?

Sorry for all these questions, however it's just not clear to me what's all possible.

Regards,
John

[Bluebird]

Hi,

I've started trading this year as a limited company. Currently I'm taking a small salary and pay national insurance etc. and the rest I get paid in dividends.
Now the dividends payout is if I understand correctly in the region of £34.000 a year.
Let's say I earn £50K a year, how can I escape paying 40% corporation tax over the £16K difference?
I hear that after two years of having the money in the company bank account that you have to pay only 10% tax. Is that right, or do I, in order to be eligible to pay only 10% tax, have to cease trading?
In that case, can I set up after ceasing trading a new Ltd company on the same address with the same director and secretary?

Can I escape paying 40% tax over the £15K by setting up a company pension plan or SIPP?

What expenses can I deduct from my taxed income and is there a limit to these expenses? I work from home sometimes. Can I offset electricity/gas/meals?

Sorry for all these questions, however it's just not clear to me what's all possible.

Regards,
John

The threashold you are talking about is the difference between lower and higher tax bands - the treashold is about £38k - but that includes ALL personal income - salary, divis - even Bank Account Interest and is part of your self assessment - nothing to do with corp tax which you pay on all your profit.

The 2 year thing you refer to is Taper Relief - do a search.

Pension won't make any difference - as it's still deemed as personal income - actually you're better of having a personal pension thaan a company one anyway.

Any expenses that you incum "wholly" for the business can be claimed, and they get taken off before tax on profit - try a search on use of office as home - there are 2 schools of thought - 1 is £2 a day, the other divide your bills by number of rooms - as with all expenses - make sure they have actually been incurred and that there is no BIK.

[SteveV]

£2 a day

I thought it was £2 per week ??

[Ardesco]

Hi,

I've started trading this year as a limited company. Currently I'm taking a small salary and pay national insurance etc. and the rest I get paid in dividends.
Now the dividends payout is if I understand correctly in the region of £34.000 a year.
Let's say I earn £50K a year, how can I escape paying 40% corporation tax over the £16K difference?

You pay CT on all of your profit, you can reduce CT paid by reducing your profit. CT is a flat rate of 20% (I think it's gone up to 20% now) on all your profit.

Dividends can only come out of profit that your company has made. So Profit * 0.80 = Amount available for dividends.

I hear that after two years of having the money in the company bank account that you have to pay only 10% tax. Is that right, or do I, in order to be eligible to pay only 10% tax, have to cease trading?
In that case, can I set up after ceasing trading a new Ltd company on the same address with the same director and secretary?

Sounds like taper releif that won't exist in two years so forget about it. Wait to see how the new CGT rules pan out.

Can I escape paying 40% tax over the £15K by setting up a company pension plan or SIPP?

You only pay 40% tax on the income you make that take you over the hight tax rate threashold. Stay under the threashold and you won't pay it, go over and you will.

You can however take a directors loan of £5000, but it needs to be paid back within 2 years. You can use this to juggle your income a bit if needed.

What expenses can I deduct from my taxed income and is there a limit to these expenses?

You can claim anything that you want, however you will have to justify it to the taxman when investigated otherwise he will classify it as a BIK and tax you accordingly. Just ask youself would the tax man accept this is an expense generated totally by the company, and an expense that I would not have made if it hadn't been for the sake of work.

I work from home sometimes. Can I offset electricity/gas/meals?

Sorry for all these questions, however it's just not clear to me what's all possible.

Regards,
John

Not worth the hassle for the ~£100 a year you will save.

CT = Coroporation Tax
CGT = Capital Gains Tax
BIK = Benefit in Kind

[SueEllen]

In that case, can I set up after ceasing trading a new Ltd company on the same address with the same director and secretary?

From April you don't need a company secretary.

Can I escape paying 40% tax over the £15K by setting up a company pension plan or SIPP?

You should speak to your accountant about paying into a pension either personally or through your company.

At the moment the calculations show it's best to pay personally but in a years time that will change as the CT rate increases. If you can't be bothered because it involves more work later on your company is allowed to pay into your own Stakeholder Pension, Personal Pension or SIPP. Just make sure it comes straight from your company bank account. (There are other threads on this today.)

What expenses can I deduct from my taxed income and is there a limit to these expenses? I work from home sometimes. Can I offset electricity/gas/meals?

Electricity and gas bills are only worth deducting as business expenses if you work from home the majority of the time. The calculations work out so that you could be claiming 50p to cover summer gas bills i.e. you will spend more time calculating it then it's worth.

You should only claim meals away from home if you are working outside your home for at least two meals worth. This is because the Revenue expects everyone to eat lunch and make arrangements to buy or bring lunch with them. However the majority of workers are at home for breakfast and dinner.

There are first timers guides on this website, on the PCG website and on SJD Accountancy website. I suggest you download the pdf's and read them then use the search facility to find out anything you are not sure on.