There have been changes recently to travel and subsistence expenses and dividend tax and these changes seem to have hit contractors and freelancers the hardest. The question on everyone’s lips though is how will the dividend tax rise affect small businesses?
The best advice for freelancers and contractors would be to form a limited company and to reduce your tax liability. There are a variety of ways you can do this:
- Ensure all shareholders in the company are using the new non-taxable £5000 dividend tax allowance
- Pay employer pension contributions from the company instead of personal pension contributions
- Take dividends at a level so that the high income child benefit charge is minimised
- Make sure you don’t pay all profits as dividend but retain them in the company so these dividends can be paid in a more tax effective time
What needs to be considered when forming a limited company though?
When you do it. A limited company can be formed anytime during the year. If you’ve been working through an umbrella company and want to switch to a limited one, it’s best to do so between contracts. However is can be done at anytime. But don’t leave this until the last minute as it is better to get it organised before your new contract starts.
Why do it? To reduce your personal risk if your business fails. Forming a limited company is also the most tax efficient way for freelancers and contractors to operate.
How to do it. The process is relatively quick and easy. Firstly you need to register (incorporate) your new company through Companies House (or why not let us handle it for you?). Next you need a company name. You can buy a ready-made name or make up your own. This involves more paperwork, but it allows you to choose something that truly reflects what you do. After that you need to open a business bank account for your company. Monies are held by the company and not you and so must be kept in a separate account. Most banks offer a business account service but make sure you do your research to pick the best one for you and your business needs. Lastly, get yourself a good accountant. Here at KPP, the contractor market is our speciality. We understand the complexities and how to make your company as tax efficient as possible.
The company director. Every limited company needs a company director (which tends to be yourself). This person is responsible for running the company properly and making sure the company makes a profit. A directorship also comes with responsibilities which are all stated on the .GOV website.
- Keep company records and report changes to Companies House and HMRC
- Make sure the company’s accounts are a true and fair view of the business’ finances
- File your accounts with Companies House and your Company Tax return with HMRC
- Pay Corporation Tax
- Register for Self-Assessment and send a personal Self-Assessment tax return every year (unless it’s a non-profit organisation and you didn’t get any pay or benefits)
We know this all sounds like a lot of effort and hard work, but that’s why we’re here. Call us today on 0141 345 2335 or visit our website http://www.kppca.co.uk