forgive me if this is a dumb question, my daughter had intended working as a sole trader from this month, and I've read up and got everything ready to do her accounts, but now she finds some of the clients who hire her, as a consultant, insist she either goes under an umbrella company or has a Limited company. she has decided to go with the latter.
I had read that paying tax as a sole trader was a tad painful to begin with and in the 2nd trading year paying on account for the 2nd years tax...does this also happen if she has a limited company? She will be drawing a monthly salary, and a small salary for me, and draw down quarterly dividends and the accountants we employ will be submitting accounts in the usual way, but I just want to be able to advise her as to how much she needs to put to one side for Tax/Class 4 each month towards her annual bill. any advise will be very gratefully received, thanks in advance.
No payments on account for a Ltd Company although installments may be required if the profits are going to be above £1.5mil
If you already employ accountants then I would suggest that you should be having this conversation with them, there is a lot more involved with having a Ltd Company than just setting up as a sole trader, but as a rough idea
The Company will pay Corporation Tax on its profits, if you and your daughter are to be employed then the Company will need to register as an employer and run monthly payroll,this will be an expense to the Company and reduce profits but depending on the level of salary then you and your daughter will be liable to income tax and employees National Insurance, the Company may also need to pay employers National Insurance contributions.
After paying Corporation Tax on the profits the Company can decide to distribute dividends, once again depending on the amounts distributed the shareholders will have to pay tax on the amounts received.
Loads more to it than this, hence why you need to discuss this with your accountants, another thing to bear in mind is if the contracts fall within IR35, this would make the setting up of a Ltd Company a waste of time and money.
Hope this helps
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
Tax paid 'on account' refers to advance payments made towards the total tax liability for the financial year. These payments are typically made by individuals or businesses that expect to have a significant tax liability at the end of the year, such as those with self-employment income or rental income. The payments are usually made in two installments, with the first due on January 31st and the second due on July 31st. These payments are applied towards the final tax liability for the year, and any excess payment is refunded or carried forward to the next tax year.
