Basic business finance
I’m finally on top of my accounting system, more or less. So I now feel sort-of-qualified to try to explain it all. This is probably mostly quite obvious, but I didn’t previously know about stuff like director’s loans. In decreasing order of obviousness:
- The company gets income.
- The company pays for outgoings.
- Whatever’s left over is profit, and is taxed as corporation tax.
- Stuff I personally pay for myself, on behalf of the company, I have to make an expense claim for. Then it’s just more standard outgoings from the company.
- I raise an invoice against companies to whom I have supplied products or services.
- Expenses which I’ve agreed I can reclaim from my the company I’m contracting to, I simply add to this invoice. Unfortunately most of them I’ve paid for personally, which means I have to record them in many places - my expense claim against Macrobug, Macrobug’s outgoings, Macrobug’s income, and Macrobug’s invoice against the contracting company. (The middle two stages are somewhat simple - it doesn’t have to be wholly itemised, but it does have to be split into categories).
- I had to pay the company for my share.
- Anything else I want to give to the company, I pay as a Director’s Loan. I can claim that back at a later stage, without any fuss.
- If the company wants to pay me, and hopefully it will do, then I have a choice. Either I can pay myself a salary - taxed as normal with income tax, national insurance, etc. - or I can pay myself dividends out of the profits. These dividends are taxed at corporation tax rates, which is less than income tax/NI, so it’s obviously preferable to pay dividends. However it’s important to pay enough salary to maintain national insurance continuity. Furthermore, if the Inland Revenue suspect that you’re basically an employee of a company you’re contracting to, they can choose to tax you as if you were - thus taking a big lump of tax over and above the corporation tax. This is called IR35 and is a complicated area. For various reasons I believe I am outside IR35 so it shouldn’t happen to me, but you never really know until/unless the IR come knocking. (I personally reckon that even if they did decide my contract was an employee-like relationship, they’ll have lots of full-time contractors to investigate before they get around to part-timers like me).
- Either I or my company can pay me a pension.
- VAT adds a whole wad of fun on top of that. To be honest I’m still not 100% on top of it but I’ll probably post when I am!
- I just prepare ‘day books’ of the company records, which my accountant will turn into proper accounts at the end of the year.