There comes a time in a business owner’s journey when you decide to make the move from being a sole trader, to being a limited company.
Maybe your turnover has gone up (congratulations, by the way!) and your accountant says it could be a good idea, because you’re trying to protect yourself and your personal assets if anything goes wrong or you end up getting sued. You want that structure whereby your business is considered a legally distinct body to you personally.
Maybe you want to bid for bigger contracts where they will only deal with other limited companies. Maybe you’re investing heavily in stock or equipment or premises or other business assets, and you want to reduce your personal financial risk.
Whatever the reason is for you, having a limited company gives you a lot more flexibility in terms of how you take the money out of your business and how much tax you pay.
Like we talked about in my last blog (read it here), as a limited company you pay both Corporation Tax on your profits and personal tax on the money that you pull out of your business to live on.
So why don’t you want your financial year to run from April to April, like it is when you’re a sole trader?
For a couple of very good reasons:
Firstly, as a limited company, your financial year can span two tax years – for example, running from July through to June, or September through to August.
This means that your business trading year will actually span two financial years, which is important because when the Chancellor changes tax allowances and limits, the changes are usually from the start of a financial year.
Effectively what this means is that you can end up a LOT better off, in terms of the tax you pay and the cash in your bank account.
When your accountant is looking at when to declare your dividends, when to adjust your Directors Loan Account and use your various tax allowances, they can decide what proportion of your profits goes into the last financial year and which goes into the current financial year. So you can use the allowances that are more favourable to you and work better for you at the time (and the difference really CAN be thousands of pounds).
The other main reason to not run your business year from April to April, is when it comes to getting a mortgage.
Lots of business owners think it’s difficult to get a mortgage, because they haven’t got payslips or P60s and because their income varies. In reality, a lender is ultimately looking to see whether you can afford to pay back the money that you’ve borrowed.
As a sole trader, you can provide evidence of your earnings with a SA302. It’s effectively the shortened version of your tax return and shows the lender how much money you’ve earned and paid tax on. They will take this as your income and use it to calculate the amount you can borrow for a mortgage – because as a sole trader, that net profit you’ve made on your tax return is ALL treated as your income, whether you take it out of your business account or not.
When you have a limited company though, it works differently.
There are various ways that a mortgage lender will assess how much that they will lend you. One way is to use the same SA302 as evidence of your actual salary and the dividends you’ve taken – but increasingly, mortgage lenders will allow you to use your company accounts.
Why would you want to use your limited company accounts to get a mortgage?
Well, it’s something to especially look at if money doesn’t come into your business evenly each month, but rather comes in peaks throughout the year. Maybe you have a couple of big launches or a big project or contract that comes in one go.
Depending on when the cash comes in during the year, you might find that the figures on your company accounts are different to the figures on your SA302, because it runs from a different part of the year. And that can mean that you’ve actually got better figures and can demonstrate more easily to a lender how much you can borrow, giving you the best of both worlds.
It also means that a mortgage lender can use your ‘retained profits’ in your mortgage calculations, if you didn’t withdraw it all and left some profit within your limited company for next year’s growth or reinvestment.
It’s generally worth speaking to your accountant about the best time to have your year end. My financial year runs from August to July, which works for me because I like to get everything done and dusted during the summer lull, before the ‘back to school’ energy in September when everything really ramps up again (for me and my accountant).
But lots of people choose other times of year. The second most common year end is December but of course, the flipside is that Christmas is a very busy time of year for lots of us. And it means you’re trying to get your accounts done in January, when accountants are busy enough as it is with people filing their self-assessment tax returns and all the last minute panic that inevitably ensues.
So to take the pressure off, maybe pick a time over the summer (or at least when you’re not in full launch or sales mode!), and when your accountant is less hectic too so they can give you more personal attention.
Ultimately, this is about YOU paying less tax and keeping more of your profit in your pocket, so you can create the life YOU truly desire. And whatever stage of business you’re at – whether you’re a sole trader or a limited company; whether you’ve never really looked at your financial stuff before, or you’re ready to step it up and seriously GROW your wealth – this is exactly what my Asset Accelerator™ is all about!
Over 12 months working 1:1 together, you’ll create your wealth plan, take action on it and see huge progress towards your big life and business goals… step by bitesize step, with all the support and guidance you could ever need!
I mean, maybe you want the dream house.
Maybe you’d love an investment property or two.
Maybe you want to repay your mortgage early, rent your house out and travel the world, drinking cocktails and having new adventures every day.
Maybe your kids are still quite young, but you want to fund their university costs or help them get on the property ladder when the time comes (hint – NOW is the time to start!).
Maybe you want to move the whole family to Costa Rica or pack up and travel around Europe for a few years.
Maybe you want to stop working at 50 and write books or start a charity or be the crazy dog or cat lady, with a house (or fields!) full of animals.
Maybe you’ve had some inheritance and you want to make sure it’s really working for you, to grow your wealth.
Whatever your dream looks like – you can make it happen – with the right knowledge, guidance and support.
Here’s the link again for all the Asset Accelerator™ details. Right now you’ll get a BONUS 1:1 Strategy + Planning Session too (worth £1130), to get all your financial foundations in place and so you know exactly what to tackle first.
Because let’s be honest…
10 years from now, you’ll be very glad you sorted stuff out when you did!
Until next time,
Claire
