If your profits are £25,000 or more, you’d probably be much better off as a limited company than as a sole trader or a partnership. Experts believe that a sole trader who becomes a limited company can save up to 30p in the pound. You have to know how to do it though.
Drawings
As a director or shareholder of a limited company, you can choose to take the most tax efficient amount from the business as salary, and draw more as dividends. The most tax efficient salary amount is £7,956. Up to this amount no national insurance contributions are due, either from you or from the business as your employer.
Of course, you will need more than this to live on, but as a shareholder you can take more cash as dividends, provided you have made enough profit to cover the amount. They do not attract NICs, but will be subject to personal income tax by self-assessment. In the year 1013-14, if you can keep your total taxable income in the basic tax rate band, you will only have to pay 10% tax on dividends, so they still leave you better off than if the amount was all salary. When you move into the higher rate tax band, the tax rate on dividends is 32.5% though, so it’s worth checking with your outsourced bookkeepers what is the optimum amount for your dividend.
Be Sure to Claim your Expenses Back
Don’t forget to keep all receipts for business expenses so that you can claim them against your tax liability. You must keep them for six years as the Revenue can request to see them up to that time in arrears. At the end of January each year, any with dates earlier than six years prior can be destroyed together with other financial documents such as invoices.
Should you Join the Flat Rate VAT Scheme?
If you are a member of this scheme, instead of working out the VAT you owe during each period, you pay a prescribed percentage of your turnover during the period. Some businesses can be better off in this scheme, and small businesses can find it easier to manage their cashflow with flat rate VAT. It does mean less time is needed to prepare VAT returns.
It doesn’t suit all types of business, though. We will be happy to discuss if yours is suitable and whether there would be advantages for you in joining the scheme.
