Be a winner in the tax game

Recent changes in Travel and Subsistence Expenses and Dividend Tax have hit Contractors and Freelancers hard.

Our Managing Director, Victor Korman was recently featured in a Telegraph article, looking at how the dividend tax rise will affect small businesses.

Victor’s advice to Contractors and Freelancers who want to be a winner in the tax game is to form a limited company and to reduce your tax liability by: “…ensuring all shareholders in the company are using the new non-taxable £5,000 dividend tax allowance; paying employer pension contributions from the company instead of personal pension contributions; taking dividends at a level so that the high income child benefit charge is minimised; not paying all profits as dividend but retaining profits in the company so that dividends can be paid in a more tax effective time.

So what do you need to consider when forming a limited company?

When to form a limited company
A limited company can be formed anytime during the year. If you have been working through an Umbrella company and want to switch to working through a limited company, the best time is to do it between contracts (but it can be done at anytime throughout the year). Don’t leave it until the last minute, get it all sorted before your new contract starts so that everything is in place.

Why form a limited company
By forming a limited company you are reducing your personal risk if your business fails and it is the most tax efficient way for Contractors or Freelancers to operate.

How to form a limited company
Forming a limited company is a quick and pain free process. You need to register (incorporate) your company through Companies House, or we can handle this for you.

Every company needs a company name. You can either buy a ready-made company name or produce your own. Choosing your own company name means completing more paperwork, but you can choose something that represents who you are or what you do.

Secondly, you must open a business bank account. Monies held by the limited company belong to the company and not you personally and such must be held in a separate business account.

The majority of high street banks offer a business account service. Do your homework and choose the one that best suits your business needs.

Thirdly, appoint a good accountant. Again, there are plenty of us out there but not all are as experienced in the Contractor or Freelancer market as we are. The UK system is very complex and you need to use a company who has knowledge in this area so you are as tax efficient as possible.

What is a company director and what are their responsibilities?
Every limited company must appoint a company director (generally this is you). A company director is responsible for making sure the company is run properly and tries to ensure the company makes a profit. A directorship also comes with certain responsibilities as 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 an non-profit organisation and you didn’t get any pay or benefits)

It may sound like a lot of work and responsibility but your accountant will handle most of this for you.

If you are still undecided further tips can be found in our article: Forming a limited company: Top tips from company directors.