freelance tech de registering as Ltd Company - is it worth it

[stringman]

Hi all,

 

When I first went freelance I set up as a Ltd Company.

I paid myself £6k pa and after expenses then had to pay corporation tax on the profit (18%) and the rest was mine as dividends- no additional tax and no NI.

I obviously paid tax and NI on the salary.

 

Thanks to Gordon and his mates I have seen corp tax creep up to 22%

So now I pay tax and Ni on my basic salary and then 22% on the profit.

 

Whilst I am paying less tax than a sole trader ( I think they pay basic rate at 25%) I have to pay an accountant as there is a lot more to ltd company accounts than sole trader accounts. So this whacks on about £1100 to my expenses.

 

Bearing in mind the profit I make is not huge ( in fact its very small) would it be worth de registering and going to sole trader- then I presume I can do all my own accounts ( I do all my own book keeping anyway) so although I pay 3% more tax I save £1100.

 

Anyone have any thoughts on this or have done the same thing?

 

all constructive advice appreciated.

 

Thanks

[dmoffat]

Well I guess it depends on how much money you make in a year. is that 3% less than £1100?

Also take into consideration not only the book keeping, but the actual tax return time to commit and file.

Also, if you make more than £40K in a year then there is the higher band of 40% tax to pay.

 

I think its a simple case of sitting down and doing the maths.

Maybe it would be worth while talking to the accountant that you pay £1100 per year, despite doing all the book keeping, and investigating whether this service is available else where?

 

Just my thoughts, and not really any answer, sorry

 

Dave

[paulears]

Unless I've got it wrong, I certainly don't pay tax at 25% - just 20% as everyone on lower tier does. A friend of mine is Ltd, I'm a sole trader, and we spent some time comparing our finances recently - we both turnover similar amounts, and until recently had the same accountant. Oddly, the differences between us in the way we manage funds hasn't made much difference to the accountancy fees for either of us. At the time we both set up, it was advantageous to be Ltd, but just a few months later, the advantage went away. The only real thing we nailed down was that on forms, and his credit rating, he's an employee on a low income, I have a very high income, and an almost as high amount going out. So my credit rating appears to be better - my credit limits on cards are higher than his, which is odd?

 

My accountant says going Ltd wouldn't benefit me, and going sole trader for him wouldn't produce much benefit either. If I had plenty of proper employees, this would increase the risk, so then limited liability could make sense.

[Jivemaster]

Lots of people (workers and work providers) use the company status as a means of confirming status with the taxman. company to company trading shifts the burden of tax onto the company, but company to person can backfire on the company later.

[Guest lightnix]

That's an interesting point about credit ratings and one I'd not encountered before.

 

There's an extensive discussion on the ins and outs of "Going Ltd." in the old Freelancing thread. My view remains the same now as it did then: Going Ltd. can potentially offer a nice, tax-efficient trading vehicle (and an aura of corporate respectability) to some people working backstage; but they are mostly white glove collar types, e.g. LD's set designers and (maybe) operators with a desk to hire. It is generally not suitable for "Techs With A Toolkit", for a variety of previously-discussed reasons ;)

 

There's also the FACT (and I think there's much evidence for this in these very forums) that People Who Work Backstage are not, by nature, very good business people <_< This is because they are, by nature, more "vocational" types, who have shunned "convention", which includes doing it for "The Love" :wub: <_< <_< <_<

 

Running a Ltd. Co. isn't something that you can "just do" - believe me ;) It requires a different mindset i.e. one that says You Are In Business To Make Money. That's how successful businesses work (duh!). If you go into Business for any other reason than to Make Money*, then your business will probably FAIL.

 

Sorry :(

 

 

 

 

Including doing it for "The Love" and shifting tax burdens.

[zonino]

err... ASK YOUR ACCOUNTANT! thats what your paying them for right!?!

 

its difficult to judge without seeing your accounts, but the small business rate (which you'd qualify for if your profit is less than £300k and turnover is less than £1m) is 21% (see http://www.hmrc.gov.uk/ctsa/ct_rate_band.htm)

 

there may be benefits to operating through the Ltd company depending on the areas you are working in (i.e. tv) and what you are doing.

 

anyway, in summary - ask your accountant! if you're paying for them anyway....

[Colin]

I heard on a rumour mill that PLI is cheaper for a Ltd company but I know no details....

[stringman]

Thanks for the replies guys.

 

I did ask my accountant but she obviously said I should stay ltd ( she would lose the business otherwise so maybe a bit biased?)

 

If the corp tax is 21% it is due to go up to 22% soon(ish)

 

 

 

also regarding paying 40% tax

 

At the mo I only earn £6k ;) so am on the lowest rate of tax

the rest is dividends

 

If I was sole trader and I earned £40k would I be taxed on that or would I be taxed on my profits

ie £40k less my amazingly high expenses <_<

 

That I think is the main factor for me as our company has some amzing assets inc

 

roof box for car

tent

2 x push bikes

 

 

PLI I pay around £200 I think

 

keep it coming

 

cheers

[Brian]

... about £1100 to my expenses.

You're paying £1100 for an accountant and you do all your own book-keeping?

 

Find a new accountant. I was paying £700 for what sounds like a similarly complicated set of accounts (not) but by moving to a local one-man operation this year paid just over £400.

[drsound]

Just to address what seems to be a common misunderstanding - you do not need an accountant just because you're trading as a limited company. There is nothing to stop you doing the work yourself just as you would as a sole trader. You only need an accountant once you're into the realms of requiring an audit at which time you realistically wouldn't be attempting to tackle the accounts yourself anyway.

 

I did our accounts for years until we got tied up with PAYE and other complexities which made it worthwhile paying for an accountant to free up my time. To be honest if you're doing the bookkeeping anyway you're doing most of the graft yourself already. Actually filling in the Companies House and HMRC forms isn't much of a task if you've kept good records throughout the year.

 

To give my opinion on your original questions I'd have to say you're the only one who can work out what's best for you. Plug your projected earnings for next year into the sums for both scenarios and see which one leaves you better off. Then you'd need to weigh up the other benefits of each I suppose.

 

There are benefits in dealing with other organisations, both as suppliers and clients, if you're a limited company. In some cases this is purely because they perceive you as being more professional (which is of course nonsense, there are plenty of dodgy ltd companies out there).

 

Whether you are a limited co or not be very very careful with what you claim as expenses. I know a lot of contractors who have been taken to the cleaners by HMRC for showing a cavalier attitude towards 'sticking it on the company card'. You must be able to demonstrate that you don't benefit more from any purchase than the company does.

[zonino]

as someone has said, if you're going to do your accounts yourself if you aren't operating as a Ltd, then rework your accounts for your last financial year, then you can make a better decision.

 

to give you better advice we'd need to see your actual accounts (and for that I'd want paying ;-0)

[Jivemaster]

There was a post some months ago about a work provider wanting -almost requiring- freelancers to be Ltd for the confirmation that there was a company registration confirming the "freelance" status and justifying gross payment rather than PAYE.

 

How would your work providers take your de-registering.

 

Totally separately look at whether the accountancy provider you use is value for fees charged.

 

Separately again ask an accountant -yours or another- to rework last year's books on the premise of "Sole Trader" basis.

 

Will disturbing the status quo be seen by your work providers as a bad sign? Could that cost you work?

[stringman]

Thanks.

Some interesting points raised guys .

 

I am in the process of investigating the difference with my accountant whilst getting a quoute from a new one.

Although I do my own book keeping the accountant also deals with the PAYE.

 

also I seem to remember white light advising freelancers to go ltd as otherwise they would otherwise take tax and ni at source ( that may be wrong as I am not a lampie so wasnt paying any attention)

 

maybe I should just wait until I go bust ** laughs out loud **