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TonyTax
TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I am setting up a business with a colleague. We will lease

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Hi, I am setting up a business with a colleague. We will lease a premises and the start up costs will be around 8k. 6k from me and 2k from my colleague. We want to be 50 per cent equal shares, so is it best to make it a limited company and make the 8k a director loan. We think profits in Year 1 could be between 30 and 60k. Would we be best taking a directors salary from the business or dividends etc..
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi.
A limited company has higher set up, compliance and accountancy costs than an unincorporated business but as a director you are pretty much protected from being sued personally. Another advantage of a company is that other businesses prefer to deal with them as opposed to unincorporated businesses.
If you want to have equal ownership of a limited company from the start, then you have to choose whether to have one of you have a loan and not the other or both of you lending your respective cash sums to the company which can be withdrawn as and when circumstances allow. You will still need to buy the shares at,say, £1 per share. Many new companies start with 100 shares.
The downside to a loan to the company becomes apparent if it fails and you lose your money. If that were to happen, you would each have a capital loss which can only be relieved against capital gains. If you lose your investment in shares, the loss can be used against capital gains or income but that isn't a catastrophe if you only pay £50 each for your shares.
How you take income is up to you. The higher your salary, the more you can contribute personally to a personal pension plan and get tax relief, though that problem can be overcome by the company making pension contributions. The down side of a salary being over a certain level is that the employee pays employee NIC at 12%% and the company pays employer NIC at 13.8%. The first £2,000 of an employer's NIC liability will not have to be paid.
Take a look here for information on tax and NIC thresholds and rates:
https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2015-16/tax-and-tax-credit-rates-and-thresholds-for-2015-16
Many small company directors pay themselves an NIC free salary but at a level whereby they qualify for credit towards their state pension. Additional income can be taken in the form of dividends. Dividends are not liable to NIC and, for the current tax year at least, are treated as basic rate tax paid. From 2016/17, a new taxing regime will come into force for dividends.
Take a look at the links below for information on how dividends are currently taxed and how they will be taxed from 2016/17:
https://www.gov.uk/tax-on-dividends/overview
https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet
http://www.rossmartin.co.uk/directors/tax-efficient-remuneration/1591-summer-budget-2015-dividend-tax
http://www.itcontracting.com/calculators/dividend-tax-calculator-2015-16/
http://www.itcontracting.com/calculators/2016-2017-dividend-tax-increase-calculator/
I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.
Hi thanks, ***** ***** have already purchased some assets individually before we have set up the company, how do we incorporate them into the business?
Customer: replied 1 year ago.
Also do you recommend using a formation agent to cover all these things?
Expert:  TonyTax replied 1 year ago.
They can be part of your directors loan or you can take shares in exchange. It would probably be easier to treat the puchases as having been made with part of your loan monies.I would use a formation agent to avoid mistakes. An accountant or tax adviser will be able to do the figure work for you.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15840
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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