Reply to: Freelance - setting up a LTD

[ladymuck]

purely academic question.....

If the OP sold the share(s) for £40k. Netting the shareholder a 5% yield year on year (expected divs of £2k) would that be less problematic? There's still no commercial reason unless the OP was to invest that £40k into plant/premises to service the business.
Clearly that's not going to happen but is it OK for a small company to act like a PLC or is that still a no-no?

Is this where the 'close company' thing comes in?

https://www.rossmartin.co.uk/compani...-close-company

[Lance]

What are you anticipating your family member(s) will pay for these shares? Perhaps £1, or maybe £100 tops?
What are you anticipating your family member(s) will receive in dividends as reward for their investment? Perhaps £2k/year to coincide with the dividend allowance, maybe more if profits improve and they have a lower tax band otherwise unused?
That's an amazing yield on their investment, getting their money back potentially a thousand times over each year.
Would you offer that same deal to any random third party not closely connected to you? No, of course you wouldn't.

Compare that to buying shares in a PLC, where you might expect to get something like a 5% yield.
Is that same deal offered to any random third party? Yes, anyone with a bit of money can buy shares in a publicly listed company. They'll all get dividends in line with their shareholding.

That's how it's different. You'd be offering a very special deal to someone closely connected to you, and you haven't suggested there's any valid commercial reason for doing so.

purely academic question.....

If the OP sold the share(s) for £40k. Netting the shareholder a 5% yield year on year (expected divs of £2k) would that be less problematic? There's still no commercial reason unless the OP was to invest that £40k into plant/premises to service the business.
Clearly that's not going to happen but is it OK for a small company to act like a PLC or is that still a no-no?

[Maslins]

Rereading the article I agree with your statement but I'm a bit confused. Say I can go out and get shares of a public company without any contribution and I still get dividends. How is that different from having a family member or close friend as a shareholder in my LTD and pay them dividend? Why do they need to play a role in the company in order to receive dividends?

What are you anticipating your family member(s) will pay for these shares? Perhaps £1, or maybe £100 tops?
What are you anticipating your family member(s) will receive in dividends as reward for their investment? Perhaps £2k/year to coincide with the dividend allowance, maybe more if profits improve and they have a lower tax band otherwise unused?
That's an amazing yield on their investment, getting their money back potentially a thousand times over each year.
Would you offer that same deal to any random third party not closely connected to you? No, of course you wouldn't.

Compare that to buying shares in a PLC, where you might expect to get something like a 5% yield.
Is that same deal offered to any random third party? Yes, anyone with a bit of money can buy shares in a publicly listed company. They'll all get dividends in line with their shareholding.

That's how it's different. You'd be offering a very special deal to someone closely connected to you, and you haven't suggested there's any valid commercial reason for doing so.

[NotAllThere]

How is that different from having a family member or close friend as a shareholder in my LTD and pay them dividend?

Because the law says is. It is different because you are operating a very small company, you are a major shareholder and MD and are able to directly divert funds to family/friends to their benefit. Quite different from buying shares in Sainsbury's - the dividend income there is not directly targeted at any individual persons known to the board. But if you disagree, go ahead and argue it before a tax tribunal. Or do what I suggested - get professional advice. All I've written is what I understand a professional would advise. I am not an accountant or tax lawyer.

[Lance]

Rereading the article I agree with your statement but I'm a bit confused. Say I can go out and get shares of a public company without any contribution and I still get dividends. How is that different from having a family member or close friend as a shareholder in my LTD and pay them dividend? Why do they need to play a role in the company in order to receive dividends?

did you read it or not?

The aim surrounding these rules is to prevent limited company contractors from passing income to someone else in the family who pays at a lower tax rate on their earnings

You have a plan. A good plan. Don't overthink it. Don't go looking for loopholes and workarounds.

[alexthepenguin]

According to the link I posted, alphabet shares make it even more a red flag. I strongly suggest you take professional advice in your company formation, even if you do the yearly accounts yourself.

Rereading the article I agree with your statement but I'm a bit confused. Say I can go out and get shares of a public company without any contribution and I still get dividends. How is that different from having a family member or close friend as a shareholder in my LTD and pay them dividend? Why do they need to play a role in the company in order to receive dividends?

[Fred Bloggs]

yup this is the exact situation I want to avoid. I'm happy just to leave the money in the ltd

As far as I can see, it's your only (fully legal) option to avoid the 60% tax on your side hustle. I don't have the problem putting all my side hustle income into my SIPP as I am otherwise retired.

[ladymuck]

well everyone has to start somewhere I'm thinking I could pay an accountant for the first two years say and treat that as a learning fee and then do the subsequent accounts myself

That's a sensible approach to take. This is the route I went down when I first started out. I had 9 years of working in accounts behind me but still engaged an accountant to do everything initially and then reduced the level of service so now I do everything up to trial balance and the accountant just does the final accounts, submissions to CoHo and HMRC, and CT calculations.

A couple of books may help if you're not familiar with the basic mechanics of accounting. I'd recommed Frank Woods Basic Accounting 1 and 2. Actually, it's been updated to be called Frank Wood's Business Accounting but there's still two books. The principles never change and it's good to have an understanding of what the software is doing for you and what the various reports mean.

[Lance]

well everyone has to start somewhere I'm thinking I could pay an accountant for the first two years say and treat that as a learning fee and then do the subsequent accounts myself

The £1000 that will cost you will be less than paying PAYE tax so go for it.
You might even find a local accountant who'll do it for less if you're not VAT registered.

[alexthepenguin]

but you know what you're doing.
The OP doesn't..... Otherwise they wouldn't be asking.

well everyone has to start somewhere I'm thinking I could pay an accountant for the first two years say and treat that as a learning fee and then do the subsequent accounts myself

[alexthepenguin]

OK, my suggestion a few minutes ago won't work because of already maxxing out the pension to £40k. Just start a company and sit the money in there until there's a better time to use it for something. Paying 60% tax voluntarily is insane.

yup this is the exact situation I want to avoid. I'm happy just to leave the money in the ltd

[Fred Bloggs]

but you know what you're doing.
The OP doesn't..... Otherwise they wouldn't be asking.

Fair point, yes......

[krytonsheep]

My question is if I can do the accounting myself or would I need an accountant? Obviously my preference will be to do it myself given I'm not making that much on my side hustle and micro-entity accounts don't seem too daunting. But if there's value added using an accountant I'm happy to consider it.

Done accounts myself for many years and my advice would be charge the client 10% extra to cover the cost of an accountant. It's just not worth the hassle doing it yourself, and a good accountant will ensure you're getting the money out of the company in the most tax efficient way.

[Lance]

So far since middle 2020 my side hustle Ltd Co has cost me the incorporation fee at Companies House (I forget exactly how much but it was not very much at all, I got the incorporation certificate by email in about 30 minutes. Very good service from Companies House). Plus the £1 share capital. Nothing else just yet. The only other fee I am aware of presently is the confirmation fee when I do the annual confirmation statement at Companies House in a couple of months. The cloud book keeping software is free. The bank charges are 32p each time I send money to my SIPP. So let's say, it's much less than £50 per year to DIY my side hustle company per year. Yes, in my opinion it is very much worth doing.

Of course, if you yourself would wish pay 60% tax voluntarily then I am very happy for the exchequer. I wouldn't. And yes correct, I wouldn't work for less than 40% take home. I have given the OP a very simple way to manage his income and his tax affairs for mere buttons. If he/she would rather voluntarily pay 60% tax, it's fine by me.

but you know what you're doing.
The OP doesn't..... Otherwise they wouldn't be asking.

[Fred Bloggs]

on <£10k revenue, with the ongoing costs of running a company (it's more than just an accountant) is it really worth it?
If you're not willing to pay the tax I'd suggest it's not worth doing the work at all. This is chicken feed.

So far since middle 2020 my side hustle Ltd Co has cost me the incorporation fee at Companies House (I forget exactly how much but it was not very much at all, I got the incorporation certificate by email in about 30 minutes. Very good service from Companies House). Plus the £1 share capital. Nothing else just yet. The only other fee I am aware of presently is the confirmation fee when I do the annual confirmation statement at Companies House in a couple of months. The cloud book keeping software is free. The bank charges are 32p each time I send money to my SIPP. So let's say, it's much less than £50 per year to DIY my side hustle company per year. Yes, in my opinion it is very much worth doing.

Of course, if you yourself would wish pay 60% tax voluntarily then I am very happy for the exchequer. I wouldn't. And yes correct, I wouldn't work for less than 40% take home. I have given the OP a very simple way to manage his income and his tax affairs for mere buttons. If he/she would rather voluntarily pay 60% tax, it's fine by me.