Paying myself from a Ltd company

[woodss]

Hi there,

I've been self-employed for a number of years now and to pay myself I simply removed cash from my business account to my personal account using "Drawings" as the payment reference.

I've now moved to operating under a Ltd company banner, but I'm confused as to how I'm supposed to pay myself, legally. I don't want to get into a mess down the line so need to get this sorted right now.

As far as I can tell I need to register for PAYE, and pay myself a monthly salary after calculating corporation tax on the company profits. This seems a little long-winded considering I am the sole director of the company, the sole shareholder and will never take on any employees.

I can't pay myself dividends and have 0 salary because the company hasn't been trading for 2 years thus profits are obviously higher now than they have been for the last couple of years, so that option is unavailable.

Is there any way I can simply carry on as I have been doing as self-employed but still trade under the Ltd company banner? I could do without the extra legwork to be honest - nothings changed except I need to be a Ltd company due to the projects I'm working on.

Many thanks

 

[Glenn Martin]

"I can't pay myself dividends and have 0 salary because the company hasn't been trading for 2 years thus profits are obviously higher now than they have been for the last couple of years, so that option is unavailable".

What do you mean and what is the significance of the 2 years. Why cannot you take dividends or a salary if your profits are higher?

If you were profitable as a sole trader surely if you are now bigger you are making more money than before.

Normally a company director would take a annual salary of £8060 plus dividends as they see fit (depending on other income). This is not as onerous as you seem to think.

I would also suggest that you should seek the advice of an accountant if you already have not doneso. Many of the on line guys would look after everything you need for £75 to £85 per month and clearly would be worth if you are not sure as getting it wrong leads you to HMRC penalty regime.

Your suggestion of having the company for protection but paying tax under self assessment is a cake and eat scenario and will not work and will just lead to bigger problems

Who told you to change to a Limited Company in first place?

 

[MikeJ]

Get an accountant. He'll save you money.

 

[woodss]

https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company

Your company mustn’t pay out more in dividends than its available profits from current and previous financial years.

Since I am just beginning to trade as a Ltd company, there is 0 profit from previous years.

I will be seeking the advice of an accountant - previously I've done the books myself with help from my wife but I don't want to do it myself for three reasons: lack of time, lack of knowledge and lack of interest . It's best left to a professional.

Who told you to change to a Limited Company in first place?

One large client I am now dealing with will only contract with a Ltd company. Since I was looking into it anyway this has just accelerated the process.

 

[STDFR33]

Hi there,

I've been self-employed for a number of years now and to pay myself I simply removed cash from my business account to my personal account using "Drawings" as the payment reference.

I've now moved to operating under a Ltd company banner, but I'm confused as to how I'm supposed to pay myself, legally. I don't want to get into a mess down the line so need to get this sorted right now.

As far as I can tell I need to register for PAYE, and pay myself a monthly salary after calculating corporation tax on the company profits. This seems a little long-winded considering I am the sole director of the company, the sole shareholder and will never take on any employees.

I can't pay myself dividends and have 0 salary because the company hasn't been trading for 2 years thus profits are obviously higher now than they have been for the last couple of years, so that option is unavailable.

Is there any way I can simply carry on as I have been doing as self-employed but still trade under the Ltd company banner? I could do without the extra legwork to be honest - nothings changed except I need to be a Ltd company due to the projects I'm working on.

Many thanks

Are you saying that you have been working using the company name, but have been reporting your profits on a sole trader basis via self assessment?

 

[woodss]

No, I've been working under my own name and doing self assessment.

Now I want to pull everything under a Ltd company banner.

 

[STDFR33]

The company can pay you a salary. It doesn't need sufficient profits to pay you a salary (unlike dividends).

Dependant on the level of salary, you may have to operate a PAYE scheme.

You can pay dividends if there are sufficient retained earnings to do so. You can draw up management accounts at any time, accruing for any corporation tax and declare a dividend.

Any salary you pay yourself will reduce company profits, and therefore reduce the amount available to take as dividends.

You cannot trade through the company name and report the income on a sole trader basis.

The company will also need its own bank account. The business account for the sole trader business will not suffice.

You need to get o grips with all the issues of running a company quickly, otherwise you may end up in costly mess that can easily be avoided.

 

[Clare@ClarityTaxation]

A limited company is a separate legal entity, so go very careful about confusing your own funds with company funds. You cannot spend company money any more than Bill Gates can spend what he wants from Microsoft - it has to be accounted for, and tax has to be paid thereon (if it's due).

There are three ways to withdraw money:

Dividends - if you have profit available.

Salary - you can pay up to around £8,500 without needing a PAYE scheme set up so this could be an option for you.

Loan - simply take what you want when you want, and record it as a loan. You can then decide at a later date how you want to repay that loan to the company. It's quite common to build up a loan through the year then simply repay it by declaring (but not taking) a dividend at year end. There may be a benefit in kind on this loan (so a small tax/NI liability) but it'll be minimal, or maybe zero depending on how big the loan balance gets.

Using a loan account along with bare minimum salary would seem to give you the result you want - take money out and just do the paperwork once a year. Obviously you need to go careful in terms of the loan to ensure you don't take out too much and leave the company unable to pay it's debts or it's CT liability.

Don't forget expenses too - things like pensions and childcare vouchers can be very tax efficient, and make sure you're claiming mileage etc when appropriate.

Get an accountant - this is all very basic stuff that they should be able to talk you through quickly. If you use any book keeping software you should be able to keep track of any loan easily too.

 

[woodss]

Thanks for that.

I will not be trading as a sole trader any longer anyway - I will be fully under the Ltd company banner. My business bank account will have the name changed on it from "me" to the name of the company.

I appreciate your time and advice - I definitely need to see an accountant as there are way too many potential holes for me to fall into.

 

[STDFR33]

Thanks for that.

I will not be trading as a sole trader any longer anyway - I will be fully under the Ltd company banner. My business bank account will have the name changed on it from "me" to the name of the company.

I appreciate your time and advice - I definitely need to see an accountant as there are way too many potential holes for me to fall into.

You will need to set up a new bank account called WXYZ Ltd. The bank will not change it to a company bank account.

Any transactions through the existing account until a new one is opened will have to be put through your Directors Loan Account. This may have tax consequences.

 

[Clare@ClarityTaxation]

I would suggest you set up a brand new bank account too - you don't really want to create a connection between the old business records and the new business. If HMRC come knocking in regard to the new company it's better that it's ring fenced from your old self employment.

One of the key factors to get your head around when you start running a company is that it's not "you". Treat it as you would treat an employer company, try to separate yourself as "shareholder/owner" from yourself as "worker/employee".

 

[STDFR33]

One large client I am now dealing with will only contract with a Ltd company.

I forgot to mention, you may also have IR35 to contend with.

 

[woodss]

No, I work with multiple clients from my home office and on premises for others at any given time.

 

[Clare@ClarityTaxation]

No, I work with multiple clients from my home office and on premises for others at any given time.

Don't forget to claim use of home to then, and bear in mind that you're an employee now so the method of calculating it differs to that for self employed people.

Also have a google about the 24 month rule when you're bored - it applies to travel to and from regular client sites, so may apply if you're seeing the same clients on a regular basis for a fair length of time.

 

[AWA Training]

Sounds very similar to my accounts spreadsheet, though it does get confusing as i operate out of several accounts, including 2 paypal ones. Just call it wages
For a business though as i recall (and be careful going that way as they now tax dividends, so my accountant advises!), but i used to get a payslip from the accountant tell me how much i can take. The rest is in dividend payments.

 

[woodss]

Thanks for that - man there's a ton of stuff to remember, it's like running a gauntlet.

 

[STDFR33]

Don't forget to claim use of home to then, and bear in mind that you're an employee now so the method of calculating it differs to that for self employed people.

Also have a google about the 24 month rule when you're bored - it applies to travel to and from regular client sites, so may apply if you're seeing the same clients on a regular basis for a fair length of time.

Use of home - google licence agreements too

 

[AWA Training]

For a limited company though woodss, i would most certainly consider getting an accountant. As a sole trader i no longer user one, but i am most certainly keep to re-engage the services of one as soon as.

 

[Clare@ClarityTaxation]

Thanks for that - man there's a ton of stuff to remember, it's like running a gauntlet.

It doesn't need to be, and it should be quite easy once you're set up and you've got the hang of it. It's important to start off correctly though, as you'll then avoid making simple mistakes and making life difficult for yourself later on.

If you chose an accountant early on you'll have the chance to get to know them too, rather than effectively panic buying one later on when a deadline suddenly rushes to meet you!

 

[woodss]

That's exactly what I'm trying to avoid. I've been in a mess with HMRC before, I'm in no hurry to get back into one

Thanks for the help everyone.

 

[MyAccountantOnline]

A limited company is a separate legal entity, so go very careful about confusing your own funds with company funds. ...

I cant really add to what has been said already but would like to stress the importance of the above.

I, like I am sure many of the accountants here, see many clients come to me a few years down the line to sort out their company accounts and the biggest problems are created where people carry on treating the company bank account like a sole trade bank account. You have to account for all money you withdraw from a company.

 

[woodss]

Yep I completely understand that part hence why I was asking how I go about paying myself [to my current account]

Thanks for your help.

 

[Paulsou]

Sorry to butt in on this post but earlier someone mention 3 ways of money from ltd company 1)dividends 2) low salary & 3)loan.
What i would like to know is can i keep withdrawing money from the company loan back until account is zero before claiming salary or dividends?

 

[STDFR33]

Sorry to butt in on this post but earlier someone mention 3 ways of money from ltd company 1)dividends 2) low salary & 3)loan.
What i would like to know is can i keep withdrawing money from the company loan back until account is zero before claiming salary or dividends?

Taking money via loan can have tax consequences.

 

[Paulsou]

In which way would there be tax consequences if the company is just paying the directors loan back, i worked hard in a full time job paying tax and chucked all my spare cash into my new business. I just wanted to claim my cash back first before starting to take salary and then dividends! Am i wrong to do this?

 

[STDFR33]

In which way would there be tax consequences if the company is just paying the directors loan back, i worked hard in a full time job paying tax and chucked all my spare cash into my new business. I just wanted to claim my cash back first before starting to take salary and then dividends! Am i wrong to do this?

Apologies, on first reading, I thought you wanted to remunerate yourself via taking loans from the company.

If your DLA is in credit, there are no tax consequences.