Limited company - Validate my thinking please?

[CHC]

OK, just about to enter the world of contracting. My personal circumstances are right to do it now, and match all the recommendations on the guides I've read. My wife earns a reasonable income in a full-time job.

I believe the limited company route would be the best for me, especially as I'm not scared of the paperwork. I've read up quite a bit, but would appreciate a check on my thinking. I plan to:

• Register a new limited by shares company
• Appoint just one Director (myself)
• Create 100 shares, and issue 8 to me and 2 to my wife
• Find and appoint a suitable accountant (lots of good threads on that here!)
• Register for VAT

My reasons are:

1. Keeping my wife away from being a Director will avoid causing any complexities with her current employers. For the same reason I don't intend her to be an employee of the new company, so she will draw no wages from it
2. The 4:1 share ratio is my best guess as to how best to share the dividends to make best use of our respective income tax allowances

Are there any down-sides I've missed to just having one Director? If my spouse does no work for the company but receives dividends on the shares am I correct in assuming there are no tax implications other than her income tax on unearned income?

Once up and running I may in due course pay myself a small salary from the company, but I'm not sure what advantage that will give over an increased dividend payment.

Thanks in advance.

[northernladuk]

If your wife has a good job then she will likely get taxed on the dividends so first job would be an accountant who could not only set most of the stuff up for you and also look in to finer points of how much she earns and would it be the most tax efficient set up.

Advantage on the wage is you can earn up to around £7k a year more efficiently than divis. It is the standard setup. There seems to be a couple of different views about paying NI so see what your accountant suggests and see if you agree and are happy to take his advice.

Get them on board quick and they will be able to set your mind at ease about nearly everything you have just asked.

[Wanderer]

Once up and running I may in due course pay myself a small salary from the company, but I'm not sure what advantage that will give over an increased dividend payment

You are on the right track. The amount of dividend to be paid to your wife will depend on exactly how much profit your company makes and how much income your wife already has. Also be aware that you will both need to do a self assessment tax return next year. If your company profit isn't going to put you into the higher rate tax bracket or if your wife is a higher rate taxpayer already then you won't want to bother with dividend splits.

For salary, I suggest you should take a salary of £641.33/month (£7,695.96/year). Taking a salary reduces your company profits, so your avoids having to pay 20% corporation tax on the £7,695.96 salary you draw so you are about £1500 better off. It also means that your NI contributions are kept up to date (even though you don't actually pay any NI ) which will help you qualify for your state pension. Note that there is a requirement for real-time reporting of salary payments so you will need to get that setup.

You need to speak to an accountant about those two points to make sure you get them exactly right because it can be a bit counter intuitive.

[Craig at Nixon Williams]

Since your wife will have some shares in the company, it may be worth appointing her as company secretary so that she qualifies for entrepreneurs relief in the event that you later close the company and have the distribution treated as capital. In order to qualify for this you must:

• have held the shares in the company for at least 12 months
• have at least 5% of the shares
• be an employee or officer (director or company secretary) of the company.

Hope this helps!
Craig

[CHC]

Wow - useful stuff!

Many thanks guys - this is all very helpful.

As you indicate, the knack will be understanding how much I expect to take out of the company in dividends compared to how much will knock my wife into the higher rate tax bracket.

The salary advice for myself is good - I forgot to mention I will have already earned over £7k in income this financial year before I set the company up - so I doubt I will pay myself this year but will leave that until the next financial year.

I suppose now I need to find out exactly how much my wife is earning ... wish me luck

[northernladuk]

I suppose now I need to find out exactly how much my wife is earning ... wish me luck

I think technically she earns everything... or owns everything.. I forget which.

[NotAllThere]

Most employers would not have a problem with an employee being a non-active director of a small company.

[drumtochty]

You can earn up to £9,440 in the tax year without paying tax plus you can pay yourself approx £7,695 in this employment without paying national insurance. If you start your company after the 6 April 2013, the payment you can get from this employment goes down by approx £148 per week for each week you wait to register the Ltd Co after April 6th to get it NI free!

The company will have to pay 20% corp tax on any profit so there is no good reason not to pay yourself up to the NI limit and pay some 20% PATE unless you have income over and above what you have already advised.

eddie