Building your business...
...get the foundations right
The good old Construction Industry Scheme: everyone knows it, no one loves it. Designed to clamp down on dodgy dealing in the building game, it scythes off 20% of your pay before you get it, and makes you jump through hoops to claim it back. If you’re working under CIS, you’ve got to make smart decisions to get the best of it. That starts with looking at your business set-up.
When you start out, a lot of people find it makes sense to go the Sole Trader route. It’s pretty uncomplicated, and a little cheaper than the alternatives. Once you’ve established yourself a little, though, those advantages start to shift toward Limited Companies.
In fact, if you’re making over £35,000 a year, you could probably boost your take-home pay by as much as 18% overnight by making the change.
A Limited Company is a more tax-efficient way to pay yourself. With more flexibility on how you draw money from your business, from salary and dividends to company pensions, you can reduce your tax bill quite a lot. You can also bring down the amount of profit you’re paying tax on by claiming for all the expenses you’re entitled to.
If you’re working under IR35 through an Umbrella Company, for instance, HMRC dropped an anvil on you in 2016 by stopping your travel and subsistence expenses tax relief. With a Limited Company, all those essential costs of running your business can qualify to bring down your tax bill.
The other key advantage of running a Limited Company is that you’re safer if the roof caves in on you. Basically, your company becomes a whole separate legal “person” from you. That means there are strict limits on how much of your personal property and cash you can lose if the business fails.
Of course, even with a Limited Company set-up, CIS still rears its ugly head. When you’re a contractor, you carve off a chunk of money from your subcontractors’ pay and send it directly to HMRC. That hacked-off chunk is usually 20% - but only if your subbies are registered for CIS. If they aren’t, the deduction rockets up to 30%!
What if you’re working for a contractor, but still hiring subcontractors yourself, though? Well, that’s where things get a little fiddlier. Your contractor will still make CIS deductions before paying you, as normal. You’ll then take CIS payments out of your subbies’ pay. The amount you end up sending to HMRC depends on which is higher – the amount the contractor took from your pay or what you’ve taken from your subcontractors’. If you end up losing more in your own CIS payments than you’re taking from your subbies’ cash, then your Corporation Tax bill comes down to settle up. If it’s the other way around, you’ll end up owing HMRC money.
We know; it sounds like a living nightmare. With the right help, though, you’ll sail through the paperwork with no stress from the taxman. RIFT has a specialist accounting service for builders, so get in touch to find out what we can do to help. If you’re thinking of setting up a Limited Company, we can get you safely registered and guide you through the process. If you’re already running one, we can do even more to save you money and hassle.