LTD company set up question

[Inspectorclueso]

I have some business opportunities I'm developing in addition to my PAYE job. Assuming this works, I'll have a blend of day rate and one off lump sum income coming in. Not a massive amount, may vary from £20k to £50k per year I imagine.

I pay highest rate tax on PAYE and clearly don't want to pay 45% on this additional income. I don't need to access it regularly at present.

I'm thinking that best way to do this is a LTD co, with myself and my wife as directors and shareholders.

I'd be interested in any experience / knowledge as to how to deal with the income most tax efficiently. My thoughts so far:

1) Set up directors pension scheme for my wife and put up to £40k completely tax free into the scheme. She's 42 and hence we have some investment runway on this. (I don't really want any more pension as I'm over LTA)

2) Draw some income down as salary for my wife - she only earns £5k hence we have £7k ish to get out tax free.

3) If we wanted to take any further funds out, I assume we could take as dividends, which seem to be c.8% for lower rate tax payer and 33% for higher rate. So I'd obviously want to stack the dividend pay out to my wife.

Any views on these options ?

Also, in terms of setting up the LTD, to stack the dividend payment to my wife, would I need to have her own a greater % of shares e.g. 90%, or does this not matter.

I am assuming we both go as Directors, both as shareholders, which just the % allocation to then sort.

I am sure someone will say, consult an accountant, I will be doing this, this is just me gaining initial views. There are always some creative people on here !

[trickywoo]

Easiest way to do dividends is to apportion the percentages according to how you want to take the money out. There are other ways but may be unnecessarily complicated for your needs.

Your other assumptions make sense.

You need to consider the additional admin as if the company pays a salary it will need to be registered through HMRC for payroll. The company will also need annual accounts and corporation tax calculation and submission.

Pension payments are tax deductible but a company has no tax free allowance so if it makes £1 profit it will pay 20p in tax (going up).

Also be familiar with IR35 so you don’t cross any lines.

[Eric Mc]

Dividends are paid to shareholders based on the number and type of shares they own. If a company issues 100 Ordinary shares to two shareholders i.e. 50 shares each, then whatever dividend is issued by the company it should be shared 50/50 between the two shareholders.

If you want to pay different amounts to different shareholders you should decide on the shareholding levels and how they are going to be allocated between the shareholders.

Equal shareholders can receive differing dividend amounts IF one of the shareholders signs a waiver foregoing their full dividend entitlement. HMRC can query such waivers and ask for the valid commercial reasons as to why the dividends were NOT issued in accordance with the shareholding.

[Damp Logs]

Would a LLP be an option?

[MaxFromage]

With you both having significantly different marginal tax rates, HMRC could question why your spouse receives a much larger percentage of the dividends when you are earning the fees. You will want to consider this before starting out on any strategy.

The typical salary sacrifice items apply such as pensions, electric cars etc, but also consider how long this will continue and whether you could have a use for a ltd with a pot of cash in the future- property etc. Or indeed whether a MVL could work at the end with CGT applying.

[Inspectorclueso]

thanks all, speaking to accountant tomorrow hopefully as clearly there are considerations best to get right at the outset.

[DeuceDeuce]

trickywoo said:

Pension payments are tax deductible but a company has no tax free allowance so if it makes £1 profit it will pay 20p in tax (going up).

The increase in corporation tax does not apply to small companies.

Companies with profits under 50k pay 19% corporation tax (small profits rate SPR) and will continue to do so.

[Terminator X]

DeuceDeuce said:

trickywoo said:

Pension payments are tax deductible but a company has no tax free allowance so if it makes £1 profit it will pay 20p in tax (going up).

The increase in corporation tax does not apply to small companies.

Companies with profits under 50k pay 19% corporation tax (small profits rate SPR) and will continue to do so.

What about small companies with profits of £51k?

TX.

[DeuceDeuce]

Terminator X said:

What about small companies with profits of £51k?

TX.

Seriously? If so, or if it helps others…

Marginal relief is given for companies with profits between £50,000 (lower limit) and £250,000 (upper limit).

From 1 April 2023: the marginal relief calculation

Marginal relief is given by reducing the charge to Corporation Tax (25%) by the following:

(U-A) x N/A x F

F = Standard marginal relief fraction (3/200)

U = Upper limit (£250,000*)

A = Augmented profits

N = Taxable total profits

[MaxFromage]

I think he was more likely querying your terminology:

'The increase in corporation tax does not apply to small companies.'

The increase in corporation tax does apply to small companies. Profit including a few other factors determine the rate.

[Eric Mc]

And owning multiple companies dilutes the £50,000 and £250,000 band.