Running a limited company isn’t always a walk in the park. There are a lot of different things to understand, from the rules around salaries and expenses to corporation tax and VAT. And there are a lot of things that can cause you some major problems if you get them wrong. If you’re just setting up, it can feel like a bit of a minefield! So today we wanted to share with you 5 questions we often get asked by limited company directors, both starting out and established, that could land them in a lot of hot water if they get them wrong.
Isn’t It All My Own Money?
Business owners who treat their business like their own personal piggy bank tend to get into a lot of trouble down the line. So, let’s clear this up. In setting up a limited company, you are legally separating yourself from the company. This is great for liability purposes, but it does mean that the money in the company bank account is owned by the company, and not by you. Even if you own 100% of the shares in the company, that money still isn’t yours. Instead you can take money out of your business by:
- Taking a salary
- Paying yourself a dividend
- Reclaim your expenses (for example, mileage)
- Borrow money (which will be taxed at 32.5% if it’s not paid back within 9 months)
If you do take money out of the company without jumping through these hoops, you could end up in trouble with the tax man.
I Don’t Need A Payroll If It’s Just Me, Do I?
If you were a sole trader, then with would be true. But as a limited company, you are legally considered an employee, even if you’re a director. So you need to set yourself up an official payroll and register it with HMRC. You also need to notify HMRC every single time you pay yourself. Don’t worry – your accountant can take care of payroll and notifying HMRC on your behalf.
My Company Isn’t Trading Yet, So I Don’t Need To Do Anything
If your company is still in the formation phase and not actually trading yet, you could be forgiven for thinking that you don’t need to do anything official looking just yet. And it’s true that you won’t need to complete a corporation tax return – you just need to make sure you tell HMRC that you aren’t trading yet. However, there are still things you have to do. Even non-trading companies have to submit annual accounts to Companies House. It might feel a little pointless, filling in ‘0’ on every line, but it is a requirement and keeps your business from receiving penalties before you’ve really got going. After all, if you don’t file your accounts for long enough, Companies House can actually strike your company off the record and closed. Not an ideal outcome!
I Have Payroll And VAT, So That’s All I’ve Got To Do, Isn’t It?
Amazing stuff! That’s a great start. But I’m afraid that your work isn’t done just yet. Once you’ve registered for VAT, you will need to fill out VAT returns and submit them to HMRC (even if you don’t actually owe any VAT). The way these are done is changing in April, so instead of submitting one a year, you will need to submit one a quarter, but you will be able to do it digitally. Similarly, once you’ve registered a payroll, you will need to notify HMRC every time you make a payment. You even need to submit an Employer Payment Summary to cover periods where you don’t pay anything. If you don’t stay on top of these forms, then your company will receive late filing penalties and fines. Again, your accountant can help you with these on an ongoing basis, so it’s not as bad as it seems!
What’s Corporation Tax?
If you’ve previously been an employee for another company, then you will be familiar with tax deductions. They appear on your payslip as tax being deducted at source through PAYE, so you have no nasty surprises at the end of the year. But if you’re a limited company, then no one will be deducting this tax for you, and it needs to come from somewhere – and that’s corporation tax. Corporation tax is taken as 19% (17% from 1st April 2020) of your taxable profits. There is no equivalent of the personal allowance, so you will need to pay corporation tax on ALL your profits. This can add up over the year, and many limited companies get a pretty hefty bill once a year. But it’s easy enough to plan for – we recommend putting 19% of your monthly profits into a separate business savings account, so that the money is there and ready for you when the bill comes.
At Accountwise, we work with fledgling limited companies frequently, helping them to understand their rights and obligations in running their business. We promise to only speak to you in plain English, and help you understand what you need to do and when to stay on the right side of the law. And if you don’t want to do all those things yourself, we can do them for you. To find out more, just get in touch with the team today to arrange your free consultation.