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Limited company status

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If you decide to set up a limited company, you encounter a different set of issues and rules from those which apply to a sole trader. Page Kirk's Head of accounts, Rachael Cobb, offers some advice in relation to company funds and extracting profits. Here are some things to keep in mind:

Company funds

Company funds will have to be administered by way of a business account in the company's name. The monies in any business account will belong to the limited company and not directly the shareholders. Therefore due regard will have to be made when processing personal payments. Personal payments should not be made through the business account.

Profits

A company's profits are liable to corporation tax - currently at 19%, which is separate to tax you pay as an individual. Monies can be drawn out of the company by way of dividends paid to the shareholders in accordance with the rights attached to the shares.

Shares

A company's shares reflect its control and ownership. These give the owner a right to receive monies by way of a dividend. Shareholders also have voting rights attached, which allow for decision making within the company. If the voting rights are not necessary for a particular share class, there can be a separate pool of shares with no voting rights and just a right to receive dividends.

Dividends

Dividends are not an expense for corporation tax, but are deductions from available 'reserves'.

Distributable reserves are generally the build-up of profit within a company, less any dividends that have previously been distributed.

As long as the reserves are in a positive position, being the assets outweigh the liabilities, a dividend is legal and allowable. This will be taxable upon the shareholder to whom it is paid.

The tax rates on the individual recipients are as follows:

The first £2k of dividends from 6 April 2019 are tax free.

The remainder fall into the below brackets dependent on which bracket the dividend falls into:

Tax Band Tax rate on dividends over your allowance
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%

There are also reporting requirements which arise that are different to that of a sole trade, such as submitting accounts to Companies house 9 months after the year end, and this being published on their website. For more information please feel free to contact us.

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