Setting up your Limited Company

It is normal practice for interim managers to operate through a limited company, and these notes give some relevant information if you are considering this. The contents of these pages are for guidance purposes only and should not be relied upon in specific circumstances or be seen as a substitute for legal advice, which should be sought in any case where you are unclear about the legal position. Although we do monitor changes in the law from time to time, this note may not always accurately reflect the current legal position.

Setting up a limited company

If you need to form a limited company you can either buy a ready made company from a company formation agent or incorporate a company yourself.  If you create a new company, you must agree its name and register the name and address with the Registrar of Companies at Companies House. Registration details must be shown on business letters and order forms. The full corporate name must also be shown on business letters and order forms.

Statutory documents must be completed and filed at required intervals. For further information, see www.companies-house.gov.uk

The rate of tax you pay

Paying tax: As a director of a limited company, you will pay tax on your salary, on any profits you take out as dividends and on any profits that you leave in the business. Tax on your salary is paid through PAYE at the standard Schedule E rates. Your personal allowances are set against the salary you take, not against company profits.

Profits that you leave in the business (i.e. those which you do not take as salary) are subject to Corporation Tax at the small company rate. Any profits you take out of the company as dividends are subject to corporation tax and personal tax up to your top marginal rate if appropriate. For more information on this and rates charged please go to the Inland Revenue’s website at http://www.inlandrevenue.gov.uk/startingup/index.htm

Corporation tax:

For Financial Year 2003-04

Starting rate zero
0 - £10,000

Marginal relief
£10,001 - £50,000

Small companies’ rate 19%
£50,001 - £300,000

Marginal relief
£300,001 - £1,500,000

Main rate 30%
£1,500,001 or more

The small companies' rate is 19 per cent for companies with taxable profits between £50,000 and £300,000 and the starting rate is zero for companies with taxable profits of £10,000 or below.

Marginal relief eases the transition from the starting rate to the small companies' rate for companies with profits between £10,000 and £50,000. The fraction used in the calculation of this marginal relief will be 19/400. Marginal relief also applies to companies with profits between £300,000 and £1,500,000. The fraction used in the calculation of this marginal relief will be 11/400.

The profits limits may be reduced for a company which is part of a group or has associated companies. The lower rates and marginal reliefs do not apply to close investment holding companies.

Capital allowances: These are the allowances claimed on capital expenditure, which are also known as ‘writing down allowances.’ They are not the same as depreciation. Capital allowances are claimed each year and the rates are:

• for plant and machinery (other than long-life assets) - 25% in the first year
• for cars -25% up to a maximum of £3,000

When to pay tax: As a limited company you must pay PAYE tax under Schedule E, either on the 19th of each month following the month when your salary is paid, or quarterly. Corporation Tax on company profits is due nine months after the end of the accounting year to which it relates.

Pension contributions: The amount of tax relief allowable on contributions to personal pension schemes depends on your age.

Age 35 or under 17.5% of net earnings.

Age 36-45 20% of net earnings.

Age 46-50 25% of net earnings.

Age 51-55 30% of net earnings.

Age 56-60 35% of net earnings.

Age 61-75 40% of net earnings.

No relief for contributions on earnings over £95,400

National insurance

Limited companies and employees - as a director of your own company you will normally pay Class 1 employee’s National Insurance contributions on your salary, and the company will also pay the employer’s contribution . NI contributions are not normally payable on dividends you take out of the company. Rates depend on whether you have contracted in or out. All tax and NI rates should be checked on www.inlandrevenue.gov.uk

Value Added Tax

Businesses turning over more than £54,000 must register for VAT. Below this threshold, registration is voluntary. Contact the Customs and Excise Department for further information. www.hmce.gov.uk

Auditing accounts

Companies with sales below £1,000,000 do not have to have their accounts audited.

IR 35

In April 2000 the government introduced regulations known as IR35 detailing the Inland Revenue’s approach to ‘intermediary service providers’. The aim is to ensure that people who are in effect working as employees of a client company should pay tax and National Insurance as employees of that client company, not as sole traders or as directors of their own limited company. Interim managers who work by providing services through their own limited company may be affected by these regulations, and advice should be sought where appropriate.

Further information can be found on www.inlandrevenue.gov.uk
 
It is possible to ask the Inland Revenue to give an opinion on the status of a particular engagement by providing copies of contracts and other information in advance. Work undertaken which is caught by the IR rules may have important implications for your tax and National Insurance position.

In all tax, National Insurance, pension and IR35 matters, we strongly advise you to seek specialist advice.

For more information…

The Small Business Service is the government’s channel for help and advice. It provides online advice and also operates through Business Links. Enterprise Agencies, in some areas merged with Business Links, also offer help to small businesses and start-ups. Chambers of Commerce offer help in combination with Business Links. Business Links offer information and free initial advice as well as a wide range of consultancy services for which a charge may be made. They can undertake an initial business review, which may link you with a Personal Business Adviser who can guide a business through the maze of help available, although this may not be appropriate for interim managers.

Small Business Service: www.businessadviceonline.org.uk
Business Links:  www.businesslink.co.uk
Enterprise Agencies:  www.nfea.com
Chambers of Commerce:  www.britishchambers.org.uk

Further reading:

• Lloyds TSB Small Business Guide by Sara Williams, Penguin Books
• Lloyds TSB Tax Guide by Sara Williams and John Williams, Penguin Books
• Croner’s Reference Book for the Self-employed and Smaller Business, Croner Publications Ltd