After thinking about it for a few years we have finally bitten the bullet and incorporated Blue Skies Research Ltd as a private company. Since there are two of us, we couldn’t very well set up as a sole trader and a partnership didn’t seem particularly attractive either. For our situation, the tax situation seems fairly similar in all cases: income tax and NI contributions on the one hand, versus corporation and dividend taxes on the other.
What precipitated the action is still under discussion, but will probably (hopefully!) be blogged about in the future some time. The overarching aim is to enable us to collaborate officially in research and funding applications with other partners: if anyone out there has a bit of spare end-of-project budget burning a hole in their pocket, or is considering a funding application that could benefit from our expertise, then we would certainly be interesting in hearing about it but we aren’t really planning a huge push for funding and world domination. Well not quite yet anyway 
9 comments:
>"income tax and NI contributions on the one hand, versus corporation and dividend taxes on the other."
Are you sure? have you got your head around IR35, (which might require 95% of profits as salary pushing it back to income tax and NI)?
If you can avoid IR35 then corporation tax and dividend taxes can avoid the NI to a large extent and delay paying some tax by building up funds in the company. Usually making corporation tax and dividends preferable but this may not be an option if caught by IR35.
Not 100% sure at all! But I don't think IR35 is a threat, if we aren't considered a genuine contractor then it's hard to see who is. (Could perhaps be another matter if our situation developed into a long-term exclusive relationship but we aren't expecting that. Even then, the HMRC IR35 checker seems to already give us the OK with no reference to the contract duration or exclusivity.)
As for tax, yes that's what I meant. Corporation tax at 19% of profit, dividend tax on what we take out adds to about 25%. If we were self-employed on a sole trader basis then it would be 20% income tax plus probably 9% NI (I think), which is just slightly worse. I assume legitimate expenses are much the same for both routes. I didn't try to do a precise calc as the decision was eventually taken for other reasons (just knowing that it didn't make a huge difference was enough).
But fundamentally, if we do get stung for more tax than expected, then . It's not like we have borrowed heavily and would lose our house or go bankrupt or anything. We'd just have less money for beer and bicycles!
that was a "shrug" that got elided due to brackets...
If you have considered it then that is likely to be OK. Some people don't expect a long term single customer situation but then it turns out like that, but with two of you that seems less likely to be a risk.
13.8% Ers NI then 20%IT and 12%ees NI is somewhat less palatable than either 19%+6ish% or 20% +9%
I'll take the % given to be very approximate and not calculate your expected earnings from it, or was that the deliberate puzzle for the reader?
They are (intended to be) all the standard marginal rates which is where the money will sit anyway given our existing circumstances. I'm not aiming to work hard enough to go into higher tax bands, so I suppose that gives one constraint. I ignored the 2 pounds NI class 2 or whatever it is :-) There is of course a significant chance that any of the details may change at short notice, all of the tax rates and especially the rather new treatment of dividends.
Simple fact is our hypothetical partner wanted to deal with a "proper" company and having checked that it made little odds either way we had no real reason to say no. In the worst case if it all falls through I've wasted 12 quid and a few hours on the internet :-)
Ah ok, 19% then 81% of 7.5% is close to 25% was your meaning rather than the 5k reducing 7.5% to 6ish%.
Accountancy fees may go up by rather more than £12, the accounts are more complex and more returns/forms to submit.
Another disadvantage is if you need to prove an adequate income for a mortgage application or something like that but I doubt that troubles your situation. Adequate earned income for pension contributions can be another downside of low salaries.
Sounds like you have it figured out and presumably have worked out it is best to pay salary equal to personal allowance, dividend of 5k each and delay further dividends as much as possible if there is no risk of company going bust.
Yes that's where I'd got to also. Nice to know I'd basically worked it out correctly...all the info is out there but takes a bit of sifting through.
I won't mention the VAT question....yet.... :-)
>Accountancy fees may go up by rather more than £12, the accounts are more complex and more returns/forms to submit.
Mmmm good idea. Accountancy fees are presently paid by him making me cups of tea. I might start requiring chocolate bickies too!!! Of course need to work off my streudel fat before such indulgences can really be considered. (We only aim to work half time at most, so have time to do the money sums as well as the science sums).
jules
In that case I might recommend you stop where you currently get up to and give James the job of figuring out what deferred tax is (no it is not another tax) and all the other notes to the accounts disclosure requirements as that might be worth more than a few chocy bickies.
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