# Sole trader and dividends?



## FullBloomCoffee

Hi All,

Am i correct in thinking that as a sole trader you cannot pay dividends?


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## Jumbo Ratty

You are correct.

You have to be a limited company to take advantage of dividends


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## Dallah

As a limited you can also make loans from the company to yourself. Make yourself a limited, pay yourself minimum wage and then use dividends and loans to get money into your hands.

Spend money for accountant to do this. Especially one that specialises in sole traders/contractors. Its a false economy to do this yourself at the beginning. Once you see how it works you can do it yourself but then you have to keep abreast of the latest guidance from HMRC which is a job in of itself.


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## Jumbo Ratty

ridland said:


> Its a false economy to do this yourself at the beginning. Once you see how it works you can do it yourself but then you have to keep abreast of the latest guidance from HMRC which is a job in of itself.


as a limited company you have to use an accountant.

The accounts have to be certified


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## Dallah

Jumbo Ratty said:


> as a limited company you have to use an accountant.
> 
> The accounts have to be certified


The things you learn. I've been schooled. Oops a new slang term. I hope no one takes offence.


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## FullBloomCoffee

thanks guys, Think ill have a word with an accountant then to see what they suggest is the best way to organise salary, dividends, loans etc.

the coffee shop I'm currently looking at purchasing is being run as a sole trader, however I'm sure that their accounts mentions dividends being payed :/

As a limited company are the accountant figures much higher?

Im trying to balance the best way to take over ownership whilst not incurring a rise in Tax, National insurance etc. and still being able to take money out to pay myself.

Any advice or insight is much appreciated!


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## wilse

You need to be Ltd, for divi's.

Also I believe there are changes to corporation tax in the next year or two, so please have a read up/ask an accountant for their advice.

Yes it costs more, but you'll be talking hundreds more not thousands.

I pay around £70 per month +VAT, for Ltd company accounts, tax return, quarterly VAT & personal tax malarkey.

You can also voluntary VAT register, even if you don't meet the threshold, particularly useful if you are reclaiming VAT on startup expenses.

PM if you need more information.


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## Yes Row

I pay in the region of £750 plus vat a year for limited company accounts.


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## 4085

a sole trader takes a 'wage' which is classed as drawings against profits. This means that you do an annual self assessment tax return. A limited company means that you are an employee of that company and therefore on PAye as you earn. This means you have little or no shelter or room to manoeuvre on a tax front (IMHO).

Apart from that, what liability are you looking to limit? It costs far more for an accountant to certify your accounts than for a sole trader, especially bearing in mind your turnover is unlikely to be in the hundreds of thousands.

As a sole trader, for example, you turnover £100,000. Your running expenses amount to £70,000. That means you declare a net profit to the tax man of £30,000. The first £10,000 is currently tax free so you will pay 20% tax on £20,000 plus NIC on that amount.

Your expenses have to be justifiable but there is plenty of room for creative accounting!


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## Drewster

dfk41 said:


> a sole trader takes a 'wage' which is classed as drawings against profits. This means that you do an annual self assessment tax return. *A limited company means that you are an employee of that company and therefore on PAye as you earn.* This means you have little or no shelter or room to manoeuvre on a tax front (IMHO).
> 
> Apart from that, what liability are you looking to limit? It costs far more for an accountant to certify your accounts than for a sole trader, especially bearing in mind your turnover is unlikely to be in the hundreds of thousands.
> 
> As a sole trader, for example, you turnover £100,000. Your running expenses amount to £70,000. That means you declare a net profit to the tax man of £30,000. The first £10,000 is currently tax free so you will pay 20% tax on £20,000 plus NIC on that amount.
> 
> Your expenses have to be justifiable but there is plenty of room for creative accounting!


To be pedantic running the business as a Limited Company doesn't necessarily mean that you have to be an employee of the company.

You could be a share holder without being an employee.

The company doesn't have to have any employees.

In general the (sole) owner of a Limited Company would often pay a salary (generally enough to use the personal tax allowance) and take out other profits in the form of dividends.

Arguably there is more room to manoeuvre tax & NI wise - even more if your life partner is also a share holder (wether or not they are also an employee).

But ANY payment salary/dividend etc is somewhat dependent on actually making profits - the costs and legal responsibilities of running a Limited Company are certainly higher/different than sole trader.


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## jeebsy

I used to take 10k salary out my limited company and take the rest as dividends. Far more tax efficient.


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## hotmetal

I went from sole trader to Ltd partly because of the nature of some of my clients (mgmt consultancies).

When discussing this with my accountant he suggested to me that as a rough guide, while Ltd is often more tax efficient, it has increased costs associated with it. For the tax benefits to outweigh the extra costs he reckoned turnover (or was is salary + dividends?) needed to be about 36k if I remember. Obviously this depends on your accountant's charges and also your ratio of business expense to turnover.


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## 4085

jeebsy said:


> I used to take 10k salary out my limited company and take the rest as dividends. Far more tax efficient.


Try applying for a mortgage! You also cannot pension contribute dividends


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## hotmetal

I would have thought that mortgage companies would be happy with 3 years accounts showing that your divvy was from your company to you as sole director, and not some high risk share holding.


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## jeebsy

dfk41 said:


> Try applying for a mortgage! You also cannot pension contribute dividends


I did and I got a very nice one on the back of two years accounts


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## FullBloomCoffee

Is there a limit on the number of shareholders you can have? or what constitutes a shareholder?

and can you leave profits within the business or does it all have to be equally split and payed out as dividends?


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## 4085

Mortgage companies will never in my experience give a dividend as part of their calculation as an income multiple. A basic wage as an employee is guaranteed whereas someone taking the minimum out then topping up with dividends which are not guaranteed to be paid. This all changed several years ago from the days when firms fell over to lend you money. I suspect you will find a large difference between what you would imagine will happen and what actually does


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## 4085

BeanAbout said:


> Is there a limit on the number of shareholders you can have? or what constitutes a shareholder?
> 
> and can you leave profits within the business or does it all have to be equally split and payed out as dividends?


A dividend is just a way of taking money out of the company. The company will already have paid Corporation Tax on profits. There are all sorts of things your accountant can do for you, but I suspect you need to walk before you run. Why not set up as non incorporated and then go limited if you actually need to.


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## jeebsy

dfk41 said:


> Mortgage companies will never in my experience give a dividend as part of their calculation as an income multiple. A basic wage as an employee is guaranteed whereas someone taking the minimum out then topping up with dividends which are not guaranteed to be paid. This all changed several years ago from the days when firms fell over to lend you money. I suspect you will find a large difference between what you would imagine will happen and what actually does


Several do, it's not really a problem. The advisor I used got a couple of my mates offers with one year's audited account


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## 4085

Audited accounts are different though from someone applying for a mortgage as an employee/director on minimum wage topped up by dividend. Anyway I am just suggesting a rule of thumb as each case will be judged on its own merits


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## jeebsy

If you're the sole director/shareholder they treat your accounts as proof of income effectively


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## mrsimba

I've a limited company myself & no problem at all with having salary + dividends classed as 'income'

As with most things they are looking for consistency if you can show a few years accounts where you draw the same levels of dividends year on year and everything is in order there is no problem at all!


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## Jon

dfk41 said:


> Mortgage companies will never in my experience give a dividend as part of their calculation as an income multiple.


Some did - when I applied last year.

Some others wanted 2-3 years company accounts instead.

I found multiples were perhaps slightly smaller with both of these than some of the crazy multiples salaried friends get offered.


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## 4085

My comment though, were aimed at the OP. I was just making him aware of the fact that if he goes Limited from day one, then needs to borrow, refinance, remortgage etc, he may well struggle. In the same way, that as a limited company, he will be an employee and as such, at some point have to offer himself Autoenrolment,whether he takes it or not is another matter. He still cannot pension dividend payments and as a sole trader, he does not have to Autoenrol. As someone who gives advice,I would say pay someone local to you to give you that advice so at least you have something to fall back onto or hold accountable, rather than asking us forum members!


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## Jon

True.

And the value of your investment can go down as well as up.


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## wilse

I recently had to provide 3 years 'books' for a mortgage application [which was successful]

And my dividends were not allowed to be included in the calculations.


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## Jon of Newbury

Hi there,

There is some good advice on this tread and some poorly informed advice. Rather than give an opinion, I will pass on some knowledge:

You have a legal identity. Your salaried income is taxed in terms of income tax and national insurance contributions. If you incorporate as a limited liability company (this takes 20 mins of your time and can be done online and costs £15 (https://www.gov.uk/register-a-company-online) the revenue from the business is not yours. It is the company's. The company pays corporation tax on its profits. What ever money is left over is your net profit, which can distribute to shareholders. There is no limit to my knowledge. You can then pay yourself and other shareholders a dividend.

Dividends are not taxed at the same rate as income (i.e. from a salary). https://www.gov.uk/tax-on-dividends/how-dividends-are-taxed

Say you made £50,600 after deducting any and all costs possible. You would probably want to minimise your tax liability. As pointed out, you could pay yourself £10,600 to fully use your personal allowance. Tax paid so far is zero for both the company. The company would pay 20% of the remainder as corporation tax. The state now has £10,000. Boo! The remaining £40,000 could be distributed to the shareholders as a dividend. For simplicity, say you are the shareholder. You would have to pay tax on £40,000 of dividend income. £31,785 is taxed at 0%! Yay! £8,215 is taxed at 25%, so you lose £2,053.75. So your effective tax rate is 23.8% (£10,000 + £2053.75) / £50,600. If you have a second shareholder (say partner) the dividend income wouldn't be taxed as neither of you would earn above the basic rate.

A rough calculation shows paying yourself a salary as similar (I can't be bothered to look up at the classes of national insurance and their earnings limits). However, the marginal rate of tax in the company paying dividend scenario is 25% (as a higher rate tax payer). As a sole trader taking a salary it is 40% (higher rate tax rate). Anyway...

The costs of running a business a limited company are not high. You must submit an annual return each year. This takes about 10-15 mins and costs £13 at the time of writing. It is not true that an accountant must prepare your accounts. It may be easier, but it is not a legal requirement. I prepare my accounts for the two business's for which I am a director/shareholder of. It took a lot of reading and learning the first year, but now I have an Excel template which I can put numbers into and I can submit 'micro accounts' as a small business entity. If you are organised and are willing to learn new things you can do this.

The last point is that because the company is separate from you, what you have remains yours even if business doesn't succeed and ends up owing people money.

So, if you want to pay yourself as a dividend, incorporate. It may or may not be more tax efficient.


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## oddknack

OP: you can certainly learn enough to do it yourself, and there is plenty of good material here to get started making decisions. However, as has been pointed out it is probably a good idea to bring an accountant in, and ultimately outsource the accounts and tax work. If your trade is financial reporting then it makes sense to me to try to be clever at financial reporting, however if your trade is something else, a coffee business, then it makes sense to me to try to be clever at coffee, service, and the running of a small business. I say this because making business decisions is slightly different to preparing accounts, or tax planning. With a new business I can imagine your "to read" pile of books is high enough, that should you be able to pay for an accountant for sensible and relevant work, this would be a good prioritisation. Regarding which accountant, some may give practical advice, some may be technically correct but not be able to explain it to you so you can use it. There are plenty of accountants. If you can visit them that should be a plus. If they understand your business that should be a plus. If they understand you, and you understand them, that should be a plus. And if you are minded to learn what they are doing, at some point you might feel you can take the work "back in", only now you will have all the templates to copy, and have seen how it has been done before. Hope that helps


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## Condyk

Jon of Newbury is correct based on my own experience, so no point repeating. It's a good summary.

I would add that having a decent, local accountant can be invaluable. Note the word DECENT. Go by trusted recommendations if you can. I had a rubbish one at first and had to get rid as they didn't understand retail/food and actually charged us for their time spent finding stuff out ... stuff that was quite basic IMO. Running a shop is tough work: some will like a bit of time off and some will like to work 6-7 days a week for 10-12 hours a day. Make your own choice. I prefer having an accountant and more leisure time. They should ideally be local so you can take your 'books' to them every month (or quarter). Make a lever arch file, section it with your budget headings, like rent, food, utilities, whatever you prefer, etc and then just stick the many/misc invoices and receipts in there as you go. Keep one file for each period. I like monthly as I prefer to monitor closely.

On VAT if you think you will not turnover more than the threshold then don't register; this would be a cart or small shop not doing food for example. If it's a new business with lots of pricey VAT items to reclaim then it's worth registering to benefit from that, as in year 2 or 3 your turnover will likely be enough to make you have to register anyway. I had a new shop that needed lots of refurb, equipment and so on so we registered to claim back VAT from the start, but as it was we turned over easily more than the threshold anyway. I'd say if you think you will turnover more then register right away.


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## RazorliteX

Jumbo Ratty said:


> as a limited company you have to use an accountant.
> 
> The accounts have to be certified


This is incorrect, only if your company turnover exceeds 3.26 million do you need an accountant with audited accounts.

The rules changed around a decade ago.

However, not using an accountant in your first few years if new to the game would be crazy.

Also, if you do use an accountant make sure they are an accountant and not a book keeper. A proper firm of accountants will keep you abreast of the latest changes and advise accordingly for maximum income retention.


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## jeebsy

RazorliteX said:


> maximum income retention.


Maximum tax avoidance


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## Yes Row

jeebsy said:


> Maximum tax avoidance


If legal, perfectly sensible


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## RazorliteX

jeebsy said:


> Maximum tax avoidance


Music to my ears..

As long as it doesn't turn into tax evasion
















edited to add:

My view from swapping to an accountant to doing it yourself is a complete waste of time. Use an expert, make sure every part of your business is watertight - do what you do to make your business perfect that is in your field of expertise and let the experts handle other matters.


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## jeebsy

I played the game too when I was contracting, but think it's a bit of double standards when corporations and super rich people get vilified for being clever with their tax arrangements but it's OK for the everyman to do it


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## RazorliteX

jeebsy said:


> I played the game too when I was contracting, but think it's a bit of double standards when corporations and super rich people get vilified for being clever with their tax arrangements but it's OK for the everyman to do it


I think they're getting super villified because the government is doing sweet fa about it whereas the small business (and contractor) are getting hammered by these APNs despite the government promising they would never act on full disclosure of tax avoidance methods.

Now poor buggers have 1 month to pay up or if they do a deal 12 months despite there being no proof - the game has changed where you pay up front and then you get your money back if you win a court case / appeal process against the HMRC(!)


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## jeebsy

Payments on account....FML


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