Posted on: 5th April 2018
Business structures – Operating a Limited company
If you are deemed by HMRC to be a self-employed day trader you might choose to put the income and expenses from your day trading activities through a Limited company. A Limited company is a separate legal entity to the person or people running the company. Here we will assume that the day trader works alone and doesn’t share the operation of his day trading business with anyone else. In this case the day trader will incorporate his day trading business and be the sole Director of a private Limited company. In order to incorporate, the day trader must register with Companies House. Please see the link to the .gov website for more information:
You can register directly with Companies House or use a company formation agent to do this on your behalf. There is a list agents on the .gov website. You will also need to register for Corporation tax within 3 months of starting the business. There is an administrative burden to running a Limited company and if you choose this route you should make yourself aware of your responsibilities as a Director of a Limited company. You can find out more on the .gov website.
At the end of a financial year you must file annual statutory accounts with Companies House, file a Corporation Tax return with HMRC and pay the Corporation Tax due. The accounting period for Corporation Tax is usually the same 12 months as the company’s financial year covered by the annual accounts. Please click the following link to review the relevant filing dates:
As a company Director you must also file a self-assessment tax return to report your personal tax liability. You will need to register for self-assessment with HMRC if you’ve never had to complete a self-assessment tax return before.
You must also file a confirmation statement with Companies House at least once a year. The confirmation statement is filed with Companies House to confirm that the information they hold is up to date. You can read more about the confirmation statement here:
Why run a Limited company?
Although there is an administrative burden attached to operating via a Limited company, it can be tax efficient to put your day trading profits through a Limited company. Whether or not it is beneficial tends to depend on the level of the day trader’s earnings.
The main thing to remember when operating a Limited company is that you cannot draw money from the company without triggering a tax event. This means that every time you want to take money out of the company you either have to pay yourself a salary and/or dividends, which in both cases will be subject to tax on amounts paid over the respective tax free allowance.
Paying yourself a salary will mean that you have to operate PAYE (Pay as You Earn) by running a monthly payroll. The tax rates applied to the salary are the income tax rates for the relevant tax year. You can download the PDF which shows the tax rates for 2018/19.
In addition, as you are an employee of your company and the company that you own is also your employer, you will have a liability to both employee’s National Insurance Contributions (NICs) and employer’s NICs.
Paying a dividend
Dividends are paid from profits after the deduction of Corporation Tax. For the tax year 2018/19, the first £2,000 of the dividend paid in a tax year is tax free. Please see the link to HMRC’s website detailing how tax is calculated on dividends above the £2,000 allowance:
Another way that money can be drawn from a Limited company is by making a Director’s loan payment to yourself. If you draw money from the company and it has not been classed as salary or dividends then it will be treated as a Director’s loan. Please see HMRC’s website below for the tax consequences of making a Director’s loan:
What’s the benefit of all this? Well as we mentioned earlier it can be tax efficient to put your day trading business through a Limited company. The fact that you can choose how much you pay yourself in salary and how much is paid in dividends can be of benefit. It should be noted that paying a salary means the payment of both employee’s and employer’s NICs, where dividends aren’t liable to NICs.
To help you decide whether running a Limited company might be of benefit to you, we like the excellent Dividend vs Salary tax calculator below provided by uktaxcalculators.
This calculator will run the numbers for you and makes the comparison between the tax due when paying a salary of:
a) no more that the Personal Allowance (£11,850 for 2018/19), with the remainder of profits (after Corporation Tax) paid in dividends; and
b) no more than the secondary threshold for NICs, with the remainder of profits (after Corporation Tax) paid in dividends; with
c) paying the maximum salary out of profits, without paying any dividends
You can then compare each of these scenarios to how much tax would be paid if you didn’t incorporate and were a sole trader.
If you’d like a more general tax calculator, again provided by uktaxcalculators, please use the following calculator:
These calculators should give you an idea of whether it is beneficial for you to incorporate.