Awesome! I Survived the pandemic restrictions to my business, I broke even and haven’t got any tax to pay! Or have I? To explore the subject of tax to pay, let’s drill into the numbers a little bit.
Here is our imaginary company, Wobbly Candles Ltd. We buy and sell scented and ornate candles in the UK that could otherwise not be sold, just because they look a little odd coming off the production line and won’t sell for the £2 retail price.
For each candle, we buy them at 50p total cost and sell them to anyone who wants to buy them for £1 each. Good money maker right?!
We go through a load of candles, some can’t even be sold and go back to recycle them – we don’t throw anything away that can be reused.
We are a team of 5 and so that we are all the same, we all have a gross salary of £40k per year. We could have hierarchical pay but that’s just not us, we are a team trying to make as much profit as we can for us all.
My Ltd company accounts summary looked like this in the year to 30th June 2021.
Not great, we broke even, but at least we all got paid. On the plus side we paid no tax!… hold on!
The Salaries shown above are gross, so tax and employee NI were deducted at source under PAYE. And there is employer NI shown above, so how much tax have we paid?
The tax and employee NI deductions were a total of £45,690, add to that the employer NI of £21,500 and we’ve paid £67,190 in tax. For no profit at all. That can’t be fair, can it?
Let us structure this as if the limited company (Ltd) company was a limited liability partnership (LLP) instead. We all work with the view to making as much profit as possible, so why not!
Working as a limited liability partnership (LLP), the same accounts with the same trading results would look like this.
Awesome, we have made a massive profit, but where are the salary costs here?
As a limited liability partnership (LLP), we are all partners and we take an equal drawing every month. When it was a Ltd company, each of the team had a net pay of £2,572 per month. Now we draw out the same £2,572 per month.
Drawings are non-taxable income and are made in anticipation of profits in the company. They cannot be shown as a cost to the P&L in the same way gross salary is shown in a Ltd company.
Instead, the total profits shown here is £221,500 are shared equally between the 5 partners and are presented on their personal tax returns, much like a sole trader would.
The partners are then taxed individually under the self-assessment regime, so the tax and NI due would look like this.
As a LLP, we would pay £18,968 less in tax than we have done as a Ltd company. In fact, as an LLP we can pay ourselves more!
The other added benefit of running as an LLP is the timing in cash flow. Under PAYE, the tax and NI are paid over monthly by the 22nd of each month. Running as an LLP, the partners’ taxes are paid twice annually in January and July each year. To learn more about how LLPs are taxed, click to read our article here. This frees up cash in the business and makes it easier to plan ahead and irons out any ‘sticky’ moments during the year when cash would otherwise be tight.
What is clear here, in terms of cash in the business bank, is an extra £19k sitting in the company bank account or shared out to us all at the end. More cash for doing exactly the same activities and efforts as before.
No brainer right? Get in touch with us about setting up an LLP alongside your current Ltd business to pay tax in a fairer and more efficient way.