As a contractor, you normally have the choice of establishing yourself up as either
- a sole trader or,
- a limited company.
There are advantages and disadvantages of both options, but this article is to assist people who have chosen the second options – the limited company route.
Making the decision to set-up as a limited company can be a big change if you have been used to working as a sole trader or as a PAYE worker. Many people get caught out in managing their own salary payments. If this has happened to you, do not worry, you are not alone. Getting your head around how you must manage your money when you have a limited company is normal and happens most contractors starting out.
You must always remember – think of your limited company as completely separate to you as a person. Although it is your company – you own it, you control it – it is a separate legal entity and not an extension of you as an individual.
When thinking of the money in your company bank account, do not think of it as your own money. This may seem like a strange concept at first but getting into that mindset will help you with understanding a lot more tax and money management issues with your company.
The money in your company bank account typically becomes your own personal money, by the company paying you a salary and transferring your after-tax salary payment to your personal bank account.
5 common mistakes to avoid:
1. Do not transfer money to yourself from your Company Bank Account
until you have first prepared a payroll calculation. You can then transfer yourself the after-tax amount. (The taxes should then be paid across to Revenue by the company)
2. Always complete an expense form to claim expenses from your company
If you have paid business expenses from your own personal fund (e.g. cash, debit card) you are entitled to withdraw the equal amount from your company bank account. Always complete an expense claim form and summarise all the amounts you have paid from your personal funds on the form. Then make a transfer from your company bank account into your personal bank account for the total amount of all the expenses. It is recommended that you pick a set frequency for this, such as once a month.
3. Do not pay yourself lots of small random amount
Think of yourself as a salaried employee who gets paid at set frequencies (i.e. monthly, fortnightly or weekly). This will reduce your accounts and payroll administration and make it much easier to keep on top of your tax and know where you stand
4. Do not use a company credit or debit card to pay for personal expenses
– and never make bank transfers from your company account for personal costs. Paying for personal costs from your company is like paying yourself a salary without paying the taxes due on the salary. This can quickly become a massive tax headache for you.
5. Be wary of taking “loans” from your company bank account.
Be careful of taking “loans” from your company bank account. There are a lot of rules and restrictions around this. We often see people getting caught out by taking loans from their company