Many sole traders can legitimately establish a personal company and bill their clients through their company. By paying corporation tax at 20% and taking a modest wage plus dividends from the company, a sole trader can save on income tax and National Insurance contributions, and possibly keep child benefits.
However, caution is needed if you are working solely for one company and it is only you that can supply the work or service. A tax avoidance rule, known as IR35, may treat you as a ‘disguised employee’ and therefore treat you for tax purposes as an employee (and you may also pay heavy penalties as well).
However, let’s assume that you would not be caught by IR35, here’s how you incorporate in 11 easy steps.
- Form a limited company, which can be done online with Companies House.
- Make yourself a director of the company
- Set up a business bank account
- Register for VAT if you need to (annual threshold is £82,000)
- Issue 100% of shares to yourself (for say, £100). Consider including your spouse as a shareholder/director
- Employ yourself, set up a simple employment contract between yourself and the company.
- All contracts with existing clients should be re-negotiated as between your company and your client. Ensure that all future contracts are between the company and the client.
- The company will pay 20% corporation tax on all taxable profits earned during an accounting period
- Pay yourself a salary, normally equivalent to the personal allowance (currently £10,600)
- If sufficient funds, pay any additional income via dividends (currently up to £31,785 can be paid beyond the personal allowance, tax free). No NI will be due on this income.
- If you can, keep any surplus funds earned above £42,385 each tax year, in the company. When it is time simply wind up the company and take the money out tax efficiently at this stage.
At RAE we can help with every step and ensure that you keep up-to-date with companies house filings and HMRC tax filings. We can also help with your bookkeeping, VAT and payroll. Visit www.raeyorkshire.co.uk for further information on our services.
Author: Sharron Fletcher, owner of RAE Business & Property.