Sole Trader AND Ltd co - tax allowance for both?

[VictoriaZaZ]

Hi all,
I've been a sole trader since 2006, soon to transition to a Ltd co.
I am not liable to register for VAT as while I am UK based, most sales come from USA. So my query is not to do with splitting a business for VAT avoidance.

The Ltd co will involve just me, no employees or partner

If I begin a brand new business as a sole trader, separate from the Ltd co, different bank account, separate records, etc, will I be able to claim the personal tax allowance for each, ie two times over, or will income from both be counted when the personal allowance is factored in ?

I work from home so claim a certain percentage of my rent, utilities, internet as expenses. Would I have to split these between the 2 ? Or could I just claim them all for the Ltd co and not bother to claim any such expenses for the sole trader business ? If I have to split them, can it be an uneven ratio as the Ltd company may involve 80% of my time but the new one only 20.

Yes, the reasons for 2 separate businesses are financial so it's pointless advising me to just run everything under the Ltd co

I understand 2 sole trader business only get the one personal tax allowance but wonder if the rules are different if one of the businesses is a Ltd co

Cheers !

 

[Scalloway]

If I begin a brand new business as a sole trader, separate from the Ltd co, different bank account, separate records, etc, will I be able to claim the personal tax allowance for each, ie two times over, or will income from both be counted when the personal allowance is factored in ?

You and the sole trader business are one and the same. The limited company is a separate legal identity. The limited company will pay tax on its profits. The company can pay you a salary which will reduce its taxable profit but the salary will be added to your taxable income.

 

[obscure]

Companies aren't people and as such don't get "personal allowances". Instead it offsets expenses against tax - but those expenses need to be handled differently.

The Ltd can't "claim a certain percentage of my rent, utilities, internet as expenses." because the Ltd doesn't rent your house, pay for your internet or your utilities... you do.

You could rent your spare room to the Ltd company and the company would then be able to offset that cost against tax..... but the rent money coming to you would be treated as income and have to be declared on your personal tax return. Also, renting your spare room to a Ltd company might be a breach of your rental agreement.

Put simply, you need to pay an accountant to help you understand how best to handle the two separate businesses. Pay now to get it right so that you don't keep paying (in costly mistakes) going forward.

 

[Mr D]

Your limited company can pay part of your income by way of a dividend from profits.
The dividend has its own small tax free allowance seperate from your personal tax free allowance.

 

[VictoriaZaZ]

You and the sole trader business are one and the same. The limited company is a separate legal identity. The limited company will pay tax on its profits. The company can pay you a salary which will reduce its taxable profit but the salary will be added to your taxable income.

Thanks.
I understand salary and dividends and that I am taxed differently running a Ltd company.
I still don't understand about the sole trader side line implication though -

Let's say I begin a 2nd business , separate from the Ltd company, and set myself up as a sole trader. Money from sales related to that 2nd business go into a different bank account - just a current account. Let's say I earn 10 k from that 2nd business in the first year. This is below the level I would be taxed on, so do I get to KEEP that 10k , tax- free, as it is a separate business, or does it get "added on" to the income the Ltd company generates and become liable for tax ?

And would the 2nd (sole trader) business earnings and activity have to be included on the same tax forms as the Ltd co or would I need to file completely different returns ?

 

[Newchodge]

Forget the ltd company. The company's profits belong to the company, not to you.

You and your sole trader business, or even 10 sole trader businesses are all the same legal entity, YOU. You have an annual tax free allowance against which all your taxable income from any source is offset. Currently your tax free allowance is £11,850. You can earn £10,000 from one sole trader business and pay no tax. If you earn £10,000 from each of 2 sole trader businesses you will pay tax on £8,150.

If you earn £10,000 from your sole trader business and your Ltd company pays you a salary of £10,000 you will pay tax on £8,150.

Your self assessment tax return is only about your income - PAYE, dividends, sole trader profit. A Ltd company has to file completely different and separate tax returns because you ane the Ltd company that you own are completely separate legal entities. You really should see an accountant

 

[Scalloway]

You fill in one tax return for all your earnings from all sources, employment, salary from limited company, sole trader business profits, dividends etc.

The company completes a tax return for its profits or losses.

 

[VictoriaZaZ]

Thanks Cyndy,
I am still a little confused. I do have an accountant but can't speak to him until Monday and the whole issue is bugging me.

My Ltd company plan is to pay myself a salary of 700 a month then dividends to top this up so that net monthly income is 3, 659, keeping the total annual amount within the limits where I pay way less tax.

So if my SOLE TRADER side line earns 10 k, even though it is below the personal tax threshold, I have to pay some tax on it because somehow it gets connected to my Ltd company, despite the Ltd company being an entity in it's own right with profits owned by IT, not by me.

It's confusing. It's like trying to learn Greek transitioning into all this

 

[Newchodge]

Thanks Cyndy, that's good news then. It's essentially a perfectly legal loophole for some tax-free earnings if you get creative about how the nature of a business can be divided into separate areas .

I'm sorry I cannot see how you can possibly interpret my post in that way.

no one has yet mentioned a separate area, which is whether the ltd company and sole trader businesses are separate enough to allow them both to operate without HMRC seeing it as an attempt at tax evasion for VAT purposes.

 

[VictoriaZaZ]

Your reply came before I edited that post as once I re-read what you wrote, I understood it differently.

Well I assumed everyone reading would realize that the sole trader business would involve a completely different KIND of business to the Ltd co one, so that they indeed can be treated separately. Otherwise there is no point doing what I am considering doing. I also mentioned in my OP this has nothing to do with VAT evasion as I am not even liable for VAT as most of my sales come from the USA.

So with this in mind, does the answer change ? IE can I retain the 10 k in this hypothetical sole trader set up, tax free ?

Thanks

 

[Newchodge]

My Ltd company plan is to pay myself a salary of 700 a month then dividends to top this up so that net monthly income is 3, 659, keeping the total annual amount within the limits where I pay way less tax.

Don't mix up salary and dividends, they are treated differently for tax purposes.

Your company pays you £700 salary, (8,400 annually) so no tax or NI due on that.
Your sole trader business makes £10,000 profit, so your total income for PAYE purposes is £18,400. With a tax free allowance of £11,850 you would pay 20% tax on £6,550. (Plus self employed NI).

The first £2,000 of dividend income is tax free, then taxed at 7.5%.

None of this has anything to do with the Ltd company and is not somehow connected up to it, other than the fact that the ltd company is paying you a salary. The salary could come from any employer the situation is identical whether you are empoyed by your own limited company or anyone else.

Please bear in mind that all the tax free amounts, etc, will change on 6 april.

 

[Mr D]

Thanks Cyndy,
I am still a little confused. I do have an accountant but can't speak to him until Monday and the whole issue is bugging me.

My Ltd company plan is to pay myself a salary of 700 a month then dividends to top this up so that net monthly income is 3, 659, keeping the total annual amount within the limits where I pay way less tax.

So if my SOLE TRADER side line earns 10 k, even though it is below the personal tax threshold, I have to pay some tax on it because somehow it gets connected to my Ltd company, despite the Ltd company being an entity in it's own right with profits owned by IT, not by me.

It's confusing. It's like trying to learn Greek transitioning into all this

If all you had was £10k profit from self employment then with a full tax free allowance you'd pay no tax.
If your profit was £10k plus you had wages from the limited company then your tax would be based on your total income, with your tax free allowance taken into account.

The sole trader profit isn't linked to limited company, the two are separate legal entities.
What the limited company pays you that is income, that affects the tax you pay.

 

[VictoriaZaZ]

Thanks, your insights are greatly appreciated Cyndy.

A final Q : Do the same rules apply if the sole trader business is entirely different to the Ltd company business ? EG , say the Ltd company business is Tarot reading services, but the sole trader business is Reiki services. They are completely different.

So in this scenario, would the person still pay tax on the £6, 550 amount you mentioned or will they instead have the complete tax-free allowance and therefore pay no tax at all on that hypothetical 10k the sole trader business earned.....

I only ask as something you mentioned earlier gave me the impression the "rules" may be different if the nature of the businesses were separate and nothing to do with attempting VAT evasion (I am not even required to register for VAT as most sales come from USA). Though perhaps I misunderstood.

 

[Newchodge]

Thanks, your insights are greatly appreciated Cyndy.

A final Q : Do the same rules apply if the sole trader business is entirely different to the Ltd company business ? EG , say the Ltd company business is Tarot reading services, but the sole trader business is Reiki services. They are completely different.

So in this scenario, would the person still pay tax on the £6, 550 amount you mentioned or will they instead have the complete tax-free allowance and therefore pay no tax at all on that hypothetical 10k the sole trader business earned.....

I only ask as something you mentioned earlier gave me the impression the "rules" may be different if the nature of the businesses were separate and nothing to do with attempting VAT evasion (I am not even required to register for VAT as most sales come from USA). Though perhaps I misunderstood.

No it doesn't matter, the tax free allowance is personal to you and you only get one, whatever the source of your income.

HMRC look very closely at people who run a ltd comapny and a sole trader business as well, to ensure there is no artificil separation to avoid having to register for VAt. Tarot reading and Reiki are both personal services and may be considered not to be separate enough to be different entities for tax purposes.

 

[Mr D]

Thanks, your insights are greatly appreciated Cyndy.

A final Q : Do the same rules apply if the sole trader business is entirely different to the Ltd company business ? EG , say the Ltd company business is Tarot reading services, but the sole trader business is Reiki services. They are completely different.

So in this scenario, would the person still pay tax on the £6, 550 amount you mentioned or will they instead have the complete tax-free allowance and therefore pay no tax at all on that hypothetical 10k the sole trader business earned.....

I only ask as something you mentioned earlier gave me the impression the "rules" may be different if the nature of the businesses were separate and nothing to do with attempting VAT evasion (I am not even required to register for VAT as most sales come from USA). Though perhaps I misunderstood.

Perhaps if doing tarot readings and selling hoovers there's considerable separation.

 

[VictoriaZaZ]

Ok, thank you. This is clearing up a lot of confusion for me.

In this scenario, without being number-savvy enough to figure out the exact savings, I think that by earning an extra 10k or so in a sole trader business as opposed to earning an extra 10k within the Ltd company , you do make some kind of overall tax savings as having that extra 10k in the Ltd company may push the person into paying the higher tax rate on a certain % of the company's taxable funds, as opposed to paying the 20% basic rate when that extra 10k is elsewhere.....

I "think" it means the difference between paying 20% on that £6, 550 or 40% on it. My accountant has given me a plan where I keep just below the threshold of paying anything that falls into the higher bracket. So in this hypothetical scenario I would pay £1, 310 tax instead of double that.

So this doesn't really save much at all actually ! Especially when factoring in extra accountancy fees for dealing with sole trader stuff on top of Ltd co stuff.

Bummer !

 

[VictoriaZaZ]

It would be easy to dream up some legitimately different business but it seems pointless as tax savings per my calculations in a previous post are so small. Maybe they become more appreciable if the sole trader business earns more but keeps it within the basic rate tax bracket.....

Being a sole trader as well as a Ltd co would appear only to benefit people who are trying to evade VAT , and can pull this off in a creative fashion that does not cast suspicion upon them.

 

[Newchodge]

Ok, thank you. This is clearing up a lot of confusion for me.

In this scenario, without being number-savvy enough to figure out the exact savings, I think that by earning an extra 10k or so in a sole trader business as opposed to earning an extra 10k within the Ltd company , you do make some kind of overall tax savings as having that extra 10k in the Ltd company may push the person into paying the higher tax rate on a certain % of the company's taxable funds, as opposed to paying the 20% basic rate when that extra 10k is elsewhere.....

I "think" it means the difference between paying 20% on that £6, 550 or 40% on it. My accountant has given me a plan where I keep just below the threshold of paying anything that falls into the higher bracket. So in this hypothetical scenario I would pay £1, 310 tax instead of double that.

So this doesn't really save much at all actually ! Especially when factoring in extra accountancy fees for dealing with sole trader stuff on top of Ltd co stuff.


Bummer !

I am sorry, but you are still totally confused. Whatever salary the company pays you reduces the company's pre tax profit, therefore reduces the amount of corporation tax payable.

Your personal income, whatever the source, be it salary from the ltd, sole trader profit or anything else is all treatred the same way.

Your personal tax position is unaffected by the profits (or losses) made by the ltd company.

You really, really, need to sit down and talk it through with your accountant. Try and bear in mind that the money the ltd company earns is not yours and cannot in any way affect your personal tax position.

 

[VictoriaZaZ]

oh dear, ok. I find it all EXTREMELY complicated. It's all so different from how being a sole trader operates. It's like a totally new language to learn and I only " landed in the country" so to speak a couple of days ago , when I first talked a bit about it with my accountant.

Sounds like whatever I would earn as a sole trader would basically just get tagged on to what I get paid from the business, so that extra hypothetical 10k saves me absolutely nothing as all income of any kind is combined.

 

[Newchodge]

Sounds like whatever I would earn as a sole trader would basically just get tagged on to what I get paid from the business, so that extra hypothetical 10k saves me absolutely nothing as all income of any kind is combined.

Yes.

 

[obscure]

Sounds like whatever I would earn as a sole trader would basically just get tagged on to what I get paid from the business, so that extra hypothetical 10k saves me absolutely nothing as all income of any kind is combined.

Exactly.
You will have two jobs. One will be working for yourself (sole trader) and the other will be working for the Ltd. Any money earned from the sole trader business is yours personally and counts against your tax allowance. Any salary earned from the Ltd is ADDED to that and also counts against your allowance.

Doesn't matter if you have one, three or 8 jobs.... you still only have one tax allowance.

 

[Maxwell83]

Rather than trading as a S.T, have you considered a 2nd limited company? When I diversified, I started separate ltd companies for each venture to give me 100% control over where I take my money from - between the 3 companies, they generate more money than I need in a year, so I pick which company (or combination of companies) I want to take income from, and can vary this each year as things change within the businesses.

Being an S.T for one of those business would remove that control - I would not have as much choice about what proportion of my income I took from each business as I have no power to 'leave money in' the S.T business.