Question on National insurance & tax

[Copestake]

I'm currently employeed by a company and and in the process of setting up my own. I wont be paying myself just putting profits back into the company. Cant seem to find any information about how much National insurance I will need to pay for techincally being employed by a 2nd company. Also I assume I wont have to pay PAYE tax?

 

[Tej]

Easy... get an accountant.. you will need an accountant.... you will need an accountant.... you will need an accountant....

 

[wood1e2]

And apart from getting an accountant, if you are not paying yourself anything then there is no PAYE... As the tax involved is on earnings.

 

[Copestake]

I was planning on doing my own accounting.. I mean how hard can it be (said in a Jeremy Clarkson tone)

 

[wood1e2]

So I would learn what PAYE means then

 

[Copestake]

I have completely no idea about tax so sounds like i'm better off getting an accountant

 

[JohnGreer]

Hi there!

I thought some background regarding the workings of Limited companies/sole trader etc might be useful for you.

Limited companies

A Limited company is a separate legal entity and as such legally exists in its own right. The company is owned by shareholders (who buys shares in the company) and essentially control the company's decision making.

The company employs directors to deal with the day to day management of the company and in practice the shareholders and directors are the same people in a small company.

The company will trade in its own right and will make a profit. That profit is subject to corporation tax, which is currently 21%. The post tax profit is free to either be left in the company for future investment etc or can be paid out to the owners of the company as a dividend.

Directors do not receive dividends, instead they are paid a salary, which I think was your original question (i.e. what tax/NI is due on this second job). As you have an exisiting job, it is almost certain that your personal tax and NI allowances would already have been used up by that employment, so you would (in all likelyhood) pay PAYE and NI on the whole of any salary drawn from your Limited company. As quite rightly stated in one of the posts above, if you don't draw any salary from your company then you won't have any PAYE or NI to pay.

Sole trader
This may be a better option for you in the early years. As a sole trader the profits of the business belong to you and will be taxed at your rate of income tax (so if you are a higher rate tax payer, you would pay 40% tax on your profits). While this may not sound like a good idea, where it can be beneficial is when you make a loss. The loss as a sole trader can be offset against your employment income (from your current job) and you will be able to get some tax back. Losses are common in the early years of trade as you will incur setup costs and income may be in short supply.

Also, once the business becomes profitable, you can sell it to your limited company, which can create further tax advantages.

The above is a very brief introduction and it is likely that there is a lot of other things that you may need to consider, but hopefully it has been helpful!

Good luck with your business, and if there is anything else I can help with, please let me know.

Best wishes

John

 

[Wild Goose]

I'm currently employeed by a company and and in the process of setting up my own. I wont be paying myself just putting profits back into the company.

If in your present job you earn below the 40% tax threshold then it would be worth your paying yourself dividends up to the 40% threshold (around £40k pa). Up to that threshold divs come to you tax free, and free of NI - you can always loan the money back to the company if you prefer to plough it back. When the company eventually repays you that loan it will be tax free.

Cant seem to find any information about how much National insurance I will need to pay for techincally being employed by a 2nd company.

NI is a proportion of your salary - which will be zero.

Also I assume I wont have to pay PAYE tax?

So as you won't be paying yourself, it follows that you will pay no incone tax. Your limited company will pay (21%) corporation tax on its profits.


There is one very large lookout for you - if you are setting up a company that will compete with your existing employer then the terms of your employment contract may not stop at misconduct but may cater for compensation to be payable to your employer. In any event your employer might sue for damages if you breach your duty to act in your employer's best interests. If you are a director of the company that presently employs you their is an even stronger fiduciary duty that would allow your existing company to sue for lost profits, unless you have written and minuted permission from a board meeting to operate a competing business. Very complex and exacting areas of employment and company law - not to be taken lightly if your new company will be competition to your present employer.

 

[John Mansley]

If you initially set up as self-empoyed (rather than as a limited company) you may encounter the possibility of National Insurance deferment, depending on the level of your employment income.