Are you a limited company director? Many people who set up a small limited company do so without a good understanding of what they can and cannot do. This blog looks at the top 5 limited company landmines – make sure you avoid them!
1. It’s all my money isn’t it?
No. It isn’t. Legally a limited company is completely separate from its owners/directors. So even if you own 100% of your small limited company the money in it isn’t yours. You can make it yours very easily, but you need to follow the correct process. Ways to take money out of your company include:
- Reclaim expenses (e.g. mileage)
- Take a salary
- Pay yourself a dividend
- Borrow money.
If you take money out but don’t jump through the right hoops for it to be viewed by the taxman as expenses, salary, or dividends then it is viewed as borrowing. If you don’t pay it back within 9 months of the year end then you get taxed an additional 32.5% on anything still outstanding.
2. If I pay myself a salary I don’t need an official payroll
Yes you do. Even if you are the only employee of your limited company you need to formally register a payroll with HMRC, and you also need to notify HMRC EVERY TIME you pay yourself (thanks to the requirements of RTI).
3. The company isn’t trading yet, so I don’t need to do anything
If your company has not yet started trading then you won’t need to complete a corporation tax return (make sure you tell HMRC that the company isn’t trading yet). However even if the company has done absolutely nothing you still need to file dormant company accounts and a confirmation statement with Companies House. These are straight forward, but if you don’t do your accounts you will receive late filing penalties and eventually your company will be struck off (i.e. closed). Worried this might be the case for you? Phone Companies House on 0303 1234 500 and they will be able to help.
4. I’ve set up a payroll and registered for VAT so I’m good to go
Fantastic. Well done. Now the fun gets started. Once you have registered for VAT you will have to complete and submit VAT returns, even if you don’t owe any VAT. And once you have set up a payroll you need to tell HMRC whenever you make payments – and you even have to submit an Employer Payment Summary for periods with no payments. If you don’t keep on top of these returns then you will end up being fined.
5. Corporation tax? What’s that?
If you have been an employee all your working life then you will always have had tax deducted at source through PAYE – so no nasty tax bills at the end of the year. If you are operating via a small limited company then nobody will deduct tax for you (ignoring CIS). Sometimes the eventual corporation tax bill can come as a very unpleasant shock. Corporation tax is 20% of your taxable profits – there is no equivalent of the personal allowance so it is payable on ALL your profits. The safest approach is to put 20% of your monthly profits into a business savings account so you are able to pay that tax bill when it hits (corporation tax is due 9 months after the end of your financial year).
Other things to remember
There are a lot of things to remember as a limited company director – here are a few to get you started:
- Legally you have to have a separate business bank account for the limited company;
- You will eventually need to pay for your share capital – if you set up a company with 10 shares at £1 per share you owe the company £10. If you set it up with 10,000 shares at £1 per share then you owe the company £10,000;
- If the company pays for your personal expenses then you either need to pay the company back, or you will be taxed on those payments;
- If you enter into an agreement as a limited company you don’t have a cooling off period unless the agreement specifically says that you do.
You might also want to read about company director’s responsibilities.