Should a writer set up a limited company?

Should a writer set up a limited company?

Should a writer should set up a limited company is one of the most popular questions we get asked. In this guide we’ll cover some the things you need to think about.

What are the main differences?

If you don’t have a limited company then you’re a ‘sole trader’. Your writing business and you are one and the same. Although you need to tell HMRC when you are earning an income you don’t have to set yourself up as a sole trader. You already exist!

When you set up a limited company you are creating a new legal ‘person’. Although you might be the owner and an employee of the company it exists in its own right. It can enter contracts, have a bank account, pay tax etc. It can even be sold to someone else and carry on after you die.

As a sole trader any money you earn is your money. With a limited company any money you earn isn’t your money. It belongs to your limited company not you. In order to make it your money something formal needs to happen. Typically this would be to pay you a salary through a payroll or to declare a dividend out of profit. Just helping yourself to the money in your company is always going to cause problems.

Tax Matters

Tax savings

Here is a simple example showing how much money you’d have in your pocket if you want to have all the money you earn available to spend.

Income£10,000£20,000£40,000£60,000£80,000£100,000
Sole trader£9,793£17,393£31,593£44,493£56,093£67,693
Ltd company£9,905£17,742£32,727£47,611£58,546£69,481
Annual saving£112£349£1.134£3,239£2,453£1,788
Should a writer set up a limited company?

Company ‘money box’

A company pays corporation tax at 19% whilst a typical high earner pays tax at 40%. If you don’t actually need the money now (for example – you currently have a paid job too) you can pay less tax in the company now and then take the money out of the company in later years when you do need the money. A company gives you a choice of when you want to take the money yourself.

Creative Averaging

Creative averaging is only available to sole traders and not limited companies. Creative averaging allows the profits of two tax years to be averaged out. In practice this can mean some profits that would have been taxed at 40% can be taxed at 20%.

Although a company can’t use creative averaging it can produce a similar result by timing the payments to you.

Employing family members

You can employ a family member whether or not you are running a limited company or you’re trading as a sole trader. There are a few things you always need to get right but one of the most important things is that the money you pay them is in line with the work they do. If your family member is a director or company secretary then they have an important legal position which can justify some of their pay.

Family members owning shares

A limited company can issue shares to different people. This can be a valuable way of sharing the income through a family and potentially saving tax.

Tax Deductions

Our guide to Tax Deductions For Writers covers the main things that writers can set against their taxable profits. There are a few differences to consider with a limited company.

Cars

You really have two choices as a director of a limited company. Either pay a mileage rate out for business miles (45p for the first 10,000 per year then 25p) or you have a company car.

The right decision for you can be complicated as it very much depends on factors like the car you’ll be driving and the miles you drive in a year. It’s not one we can generalise about so you need to do the sums for each situation.

Use of home

Again there are two choices. The easy option is for you company to pay you an allowance of £6 per week if you need to work from home. This is an HMRC approved rate. The alternative is that you set up a formal license agreement between yourself and your company at a market rate. Then you charge rent to your company and report the rent on your tax return less any allowable expenses attached to the rent. This can be beneficial from a tax position but can be more work to do.

Costs

Accountancy costs

A limited company will cost more. The limited company will need to prepare a proper set of accounts and a corporation tax return. There are likely to be payroll costs too and more costs for bookkeeping. Typically our fees for a sole trader are £x and our fees for a limited company are £x.

It’s also likely you will incur costs when you decide to set the company up and if you ever decide to wind it up.

Other costs

To run a company properly you should have company costs in the name of the company. This can mean suppliers – like your phone company and internet provider – may look to charge more than they do now.

Other issues

Copyright

Who owns the copyright dictates who should receive the income – you or your limited company.

This can cause a few problems:

  1. If you set your company up after you have written a book then you can’t just give the copyright to your limited company. Instead you’d need to have a written agreement to sell the copyright to your company for a market value. Valuing copyright is notoriously difficult and brings with it a risk that HMRC can look to argue for a different valuation. If you do sell your copyright to your limited company then you’ll pay income tax on the amount of the valuation.
  2. The publishing contracts need to be correct. If you set up a limited company and write a book then you (or typically your agent) needs to make sure that the contracts are in the correct name. If the company owns the copyright then it should be the company named on the contract. It’s not enough for the publisher to just pay the money into your company’s bank account. The money needs to legally belong to the company.

We can’t stress enough how important getting the paperwork correct is. We often have cases where writers have put royalties into limited companies only set up after the books have been written or where contracts are put in the name of the author rather than the limited company. These issues may not come to light for many years but could result in huge tax bills if looked at by HMRC.  Members of the Society of Authors can download a free copy of their Guide to the Pros and Cons of Forming a Limited Company.

Limited liability

If you have a limited company that gets sued then you may get some legal protection by having a limited company. Whether this will be effective or not really depends on who is suing you…and what for. Still, in some circumstances the benefits of limited liability protection is well worth having.

Disclaimer
We’ve put this guide together to give you an idea of some of the issues around a writer using a limited company. It is no substitute for proper professional advice as individual circumstances are different. Please ensure you take proper advice from a suitably qualified accountant before acting, or not acting, on any of the matters above.