New to Limited Company

[andresdrb]

Hi there,

I'm somehow new to this way of working and I'm trying to do things as good as possible so I don't run into any legal issues due to overlooking any laws I might not now (I'm pretty much new to UK laws since I moved here few months ago).

This is my case: I just started a Limited Co. after I worked in a permanent role in another company (different from my current client).

My accountant is telling me that I would be safe and 100% legal by paying myself a low salary (10K a year) and pay the rest as dividens to myself every month, since I already got a salary from my previous employer.

Doing my own research, my understanding is that this could be understood as I'm trying to avoid taxes

(Mod snip: Sorry Andre, you can't cut and paste wholesale from another website, they could get a bit upset about it. Take a lool at this: http://www.contractoruk.com/limited_companies/does_dividend-low_salary_mix_breach_minimum_wage_rules.html )

NMW was introduced to protect employees, and in our experience disputes regarding NMW are brought to the attention of the authorities by employees whose employers are breaking the law by paying less than the act stipulates (currently £5.93 per hour for those aged 21 or over, set to rise to £6.08 on 1st October 2011). Are you, as an employee of your Limited Company, likely to bring this to the attention of HM Revenue & Customs?

If HMRC were to investigate your limited company and found that you were not complying with the NMH Act then an enforcement notice could be issued. The employee would be entitled to the arrears of wages at the current rates, and the employer could face a penalty set at 50% of the underpayment, ranging from a minimum of £100 to a maximum £5,000.

As I said, I'd like to be as safe as possible, avoid any investigations/fine etc.

Any help would be very much appreciated

Thanks!

[Clare@InTouch]

You're fine to pay less than NMW if you're the director of your own company. Providing you're outside of IR35 then paying a low salary plus anything extra in dividends is usually the most tax efficient route. Have a read through here for NMW details http://www.direct.gov.uk/en/Employme...Wage/DG_175114

Company directors
If you are a company director you are an ‘office holder’ in law. You are not entitled to receive the National Minimum Wage for the work you do as an office holder. If you also have an employment contract or worker’s contract you will be entitled to the National Minimum Wage for the work you do under that contract.

You should also make sure you know what expenses you can claim, and possibly look into setting up a pension scheme (potentially a great way to withdraw money and reduce your tax at the same time). From an expenses point of view you should be thinking of things like:

Eye tests
Computer equipment
Postage & stationery
Books & technical manuals
Professional subscriptions
Insurances – professional indemnity, public liability
Travel to the client site – but do not claim petrol, that’s covered in mileage
Lunch, if you’re out on business all day (claim the actual amount, never round sums)
Breakfast if you cycle to work or have an unusual early start
Dinner if you have an unusual late finish

If you’re staying overnight you can claim the cost of accommodation, plus a round £5 overnight allowance. Otherwise avoid round sum estimates and only claim ACTUAL costs.

As always, if in doubt just ask your accountant and they should be able to confirm for you.

[northernladuk]

Doing my own research, my understanding is that this could be understood as I'm trying to avoid taxes

Sorry to appear a little rude but I would have to question the quality of your research when any guide you find on here and many other sites including an endless number of threads on here all confirm that your account speaketh the truth. In fact I think you would be extremely hard pressed to find evidence that contradicts this.

Either your research is a little flawed or your understanding of the situation is. This process reduces the tax you have to pay legitimately so technically yes you are trying to avoid paying tax you do not have to.

[Wanderer]

My accountant is telling me that I would be safe and 100% legal by paying myself a low salary (10K a year) and pay the rest as dividens to myself every month, since I already got a salary from my previous employer.

Yes it it 100% legal provided you are not caught by IR35. You need to get professional advice on that.

If you have already taken a salary from a permie job this year and you've been paid over £7,000 already then you shouldn't draw a salary from your company - just take dividends until April 6th next year and then start taking a salary of £7,000 which you can draw tax free though your accountant can advise. If you take £10,000 you will pay more tax than you have to so tell your accountant you'll take no salary this year and £7k the next.

Doing my own research, my understanding is that this could be understood as I'm trying to avoid taxes

Absolutely right! But don't confuse the tax avoidance you are doing (which is legal) with tax evasion which is illegal. Avoiding tax is doing things like buying a bottle of booze in the duty free, driving a low CO2 emission car or putting your savings into an ISA or pension.

Forget about minimum wage legislation too, that simply doesn't apply to company directors like yourself.

[Bumble79]

Yes it it 100% legal provided you are not caught by IR35. You need to get professional advice on that.

If you have already taken a salary from a permie job this year and you've been paid over £7,000 already then you shouldn't draw a salary from your company - just take dividends until April 6th next year and then start taking a salary of £7,000 which you can draw tax free though your accountant can advise. If you take £10,000 you will pay more tax than you have to so tell your accountant you'll take no salary this year and £7k the next.



Absolutely right! But don't confuse the tax avoidance you are doing (which is legal) with tax evasion which is illegal. Avoiding tax is doing things like buying a bottle of booze in the duty free, driving a low CO2 emission car or putting your savings into an ISA or pension.

Forget about minimum wage legislation too, that simply doesn't apply to company directors like yourself.

I had a question on this minimum wage thing. Will getting a minimum wage affect the credit rating in anyway, like, for eg, when a credit card has to be applied, is there a chance for the bank to come back and say that the salary is too low and we cannot issue a credit card ?? When we thought of applying for a credit card, bank refused saying that there should be a inflow of salary atleast for 3 months. The reason for asking this question is, my husband has been with an umbrella company in the last 2 months and now plans to move to limited company. If he does that, would getting a minimum salary affect his credit rating in any way? Any thoughts on this ?

[stek]

I had a question on this minimum wage thing. Will getting a minimum wage affect the credit rating in anyway, like, for eg, when a credit card has to be applied, is there a chance for the bank to come back and say that the salary is too low and we cannot issue a credit card ?? When we thought of applying for a credit card, bank refused saying that there should be a inflow of salary atleast for 3 months. The reason for asking this question is, my husband has been with an umbrella company in the last 2 months and now plans to move to limited company. If he does that, would getting a minimum salary affect his credit rating in any way? Any thoughts on this ?

It's a question of what the CC app form asks; does it ask for 'Salary' or 'Income'?

[Clare@InTouch]

I had a question on this minimum wage thing. Will getting a minimum wage affect the credit rating in anyway, like, for eg, when a credit card has to be applied, is there a chance for the bank to come back and say that the salary is too low and we cannot issue a credit card ?? When we thought of applying for a credit card, bank refused saying that there should be a inflow of salary atleast for 3 months. The reason for asking this question is, my husband has been with an umbrella company in the last 2 months and now plans to move to limited company. If he does that, would getting a minimum salary affect his credit rating in any way? Any thoughts on this ?

Your accountant should be able to issue a reference that shows turnover, profit, dividends and salary which is usually enough for most banks. Make sure it's part of the service when you appoint your accountant, some charge extra for such letters.

[Wanderer]

my husband has been with an umbrella company in the last 2 months and now plans to move to limited company. If he does that, would getting a minimum salary affect his credit rating in any way? Any thoughts on this ?

Being "self employed" can be a negative thing for your credit rating. If you want a credit card then it may be best to apply for it while your husband is "employed" by the umbrella.

I don't know your personal circumstances but as a self employed person I tend not to have big credit card debts because I'm always scared that I'll lose my job and not be able to pay them off. For me, self employed means I need to be a saver rather than a spender and I'm only happy if I have enough savings to cover at least 6 months worth of living costs should I become unemployed/sick/whatever.

If you have a mortgage then consider moving to a fully flexible one, that's the best way to get credit and smooth out the bumps.

[psychocandy]

It's a question of what the CC app form asks; does it ask for 'Salary' or 'Income'?

This is always a difficult one to answer. Just bought a settee from DFS and the salary question came up.

In the end, couldnt be arsed to explain and just said £7K for salary. Still got the interest-free mind.

[JamJarST]

This is always a difficult one to answer. Just bought a settee from DFS and the salary question came up.

In the end, couldnt be arsed to explain and just said £7K for salary. Still got the interest-free mind.

No wonder we have a debt crisis!