Capital or Income

chump,
With comments like this..."I will stand by that statement as to how his activity will be taxed"...you are much braver than me so I think you should volunteer.
Cheers, Tuffty.
 
fortunately neither us have to...a chap on this site has a ruling from the IRS on his full time spreadbetting activity so your question is 'probably' answered re taxation and that activity although I would always advocate geting such a ruling for yourself ..the ultimate protection from future audits ..bravery does not come into it Tufty if consistency prevails
 
JT,
Unless you are ironclad sure from historic trades that this activity will float and make the returns you need I would suggest you proceed on a trial period and use your CGT for the year ....if that goes well then form a limited company if thats what you wish .. I presume you wish this because of the nil rate on the first 10k of profit etc...
Good luck
 
chump said:
JT,
Unless you are ironclad sure from historic trades that this activity will float and make the returns you need I would suggest you proceed on a trial period and use your CGT for the year ....if that goes well then form a limited company if thats what you wish .. I presume you wish this because of the nil rate on the first 10k of profit etc...
Good luck
Click to expand...
The NIL rate on 10K isnt useful anymore.
The tax advantage of a Ltd company is you dont pay NICs if you only take a small salary.
If you have Ltd company you can trade a small CGT account on the side and so still get your CGT allowance.
 
The Inland Revenue gospel I linked above is interesting.

In a nutshell it seems to say that if you 'behave like a market maker' in your trading you'll be classified as a trade. If you put positions on purley in the anticipation of a particular market move (speculation) then it's Captial Gains Tax.

If you do both then they seem to imply it'll all be treated as a trade.
 
Tuffty said:
The Inland Revenue gospel I linked above is interesting.

In a nutshell it seems to say that if you 'behave like a market maker' in your trading you'll be classified as a trade. If you put positions on purley in the anticipation of a particular market move (speculation) then it's Captial Gains Tax.

If you do both then they seem to imply it'll all be treated as a trade.
Click to expand...
It would seem if you are orgainised and use a mechanical system you probably be taxed as income, if you just trade based on what you see on the charts and make up your risk on every trade (ill tradebigger on this trade cause i feel like it) you might be able to get away with paying CGT.

At then end of the day its the independant commisoners who decide not the IR.
 
donaldduke,

The case mentioned on the link page re Mr Salt may contradict your thinking regarding an organised person with a mechanical system (assuming his was mechanical).

My interpretation of that page is that someone with direct access who often buys on the bid, sells on the offer and does a large volume of trades (often calling the market direction correct too) should be taxed as a trade (income tax) whereas someone who pays the spread to trade is a speculator and should be taxed under CGT. Problem is that these bounderies between market maker and retail are getting blurred.
 
UK CGT - income tax - corporation/ltd company tax

http://www.trade2win.com/traderpedia/UK_taxation
Stamp Duty
This is a tax on the buying of all shares and property.

The main features are:

Charged at 0.5% of the total purchase cost
Doesn't apply when you sell
No stamp duty payable on spread betting or CFDs because you never actually own the actual shares


Capital Gains Tax (CGT)Capital gains arise when you dispose of assets at a profit.

Personal allowance: £8,500

This is the amount of tax-free profit an individual can accrue.

Above this figure, profits are taxed as if they were your top slice of income. If you have no other income then you will pay:

10% on the next £2090

20% on the next £30,310

40% above £32,400.
It is a common misconception that CGT is set at a flat rate of 40%.

Trading losses can be offset against profits and if necessary carried forward to offset against profits in future tax years.

Expenses, except broker commissions, cannot be claimed against profits.

Income Tax
Paid by self-employed sole traders.

Personal allowance: £4895

This is the amount of tax-free income (i.e profit) an individual can accrue.

Profits above this level are taxed like this:

10% to £2090

22% on the next £30,310

40% on any profits above £32,400

Expenses incurred wholly in the course of trading can be deducted from income.
Examples of expenses might include:

Broker commissions
Data feed
Software
Internet connection
Office rental (if trading away from home)
Trading losses can be offset against profits and if necessary carried forward to offset against profits in future tax years and indeed, in some cases, past years.

National Insurance
Self-employed sole traders will also have to pay National Insurance.

Class 2 contributions are paid at a flat rate of £2.10 per week (provided profits are above £4345 per annum. If they are not you can apply for a low earnings exemption certificate.)
Class 4 contributions are paid at a rate of 8% of profits between £4895 and £32,760, and 1% on profits above £32,760.
NI contributions are calculated on profits net of income tax.

Corporation Tax
Paid by limited companies set up by self-employed individuals in order to trade.

0% on profits up to £10,000.

23.75% on profits between £10001 and £50,000.

19% on profits between £50001 and £300,000.

32.75% on profits between £300000 and £1,500,000.

30% on profits above £1,500,000.
Individuals will also be liable to personal tax and NI as per the income schedule, but there are ways of reducing this, e.g by only paying yourself a salary equal to the personal allowance and taking the rest of your "pay" as dividends.

Sole trader or limited company?
Up until recently small businesses were able to make annual tax savings of up to £4000 by operating as a company rather than a sole trader.

Up to April 2004 you could pay less tax as a company because (since Apr 2002) small companies paid no corporation tax on the first £10000 of profits. Profits between £50,001 and £300,000 were taxed at 19% and a system of marginal tax relief smoothed the transition between the 0% and 19% levels for companies with profits between £10,001 and £50,000. As a director/shareholder of your own company you were able to reduce your income tax bill and avoid National Insurance altogether by paying yourself a salary limited to the personal allowance. You then paid yourself the rest of the money in dividends. This was a pleasant situation to be in!

But, from April 2004, in an attempt to level the field between directors of small companies and the sole traders, any money paid out to an individual as dividends is now taxed at a minimum average corporation tax rate of 19%. The change has only affected companies with profits of less than £50,000 - those with larger profits have always paid tax at an average rate of 19% anyway. If you have a smaller company and want to pay yourself a dividend, but pay an average rate of less than 19%, you now have to find money to pay extra corporation tax to the Revenue, thus cutting the amount of the dividend.

Business with the least profits have to pay the most extra in corporation tax, but even so, they still pay less tax overall than they would as sole traders.

However against the tax saving advantages of incorporating, people who are thinking of operating as a company need to consider the drawbacks, which include:

More formal and costly accounting and reporting requirements.
More formal procedures for drawing money from the business
Tougher rules for expenses and fringe benefits
The taxation of corporations set up by individuals is a complex subject and profession advice should be sought or in depth research carried out before deciding on a course of action. This article merely outlines the basics and should not be taken as advice in any form.
Click to expand...

Hi

I'm specifically talking about taxes and operating in the UK here.......

The differences and advantages-disadvantages between paying capital CGT or income tax do not seem obvious to me, based on the above information. Although there are different tax free allowances amd different rates of tax apply to the different earning levels, to me it looks like the two types of taxes would roughly equate to the same ball park figures on a persons earnings at or above £33k, by which point the top rate of 40% would be applicable within both taxes.

However, the advantages of setting up as a LTD. company and thereby paying corporation tax seem enormous. No 40% tax rates on profits above around £32k, with low tax rates of 23.75-19% on profits between 10-300k :eek: .

Can anyone set up as a LTD. company or does companies house or some other body need proof that your reasons for doing so can be reasonably justified?

How much does it cost to register yourself as a LTD. company?

When I worked for the local councils Education Services, I remember a couple of instances where supply teachers who get higher rates of hourly and daily pay than contracted teachers, who worked on an ad-hoc/non-regular basis, set themselves up as LTD. companies.
Similarly, is it possible for employees of organisations to register as LTD. companies, and be paid into their own company account by their employer? Here are a few examples.

Footballer with £4 million annual salary? with additional £4 million income from sponsors and endorsements?

Politician with £200,000 annual salary? with £800,000 additional income through writing newspaper columns?

Company finance manager, annual salary of £70,000?

Company producation manager, annual salary of £40,000?

Or, because such arrangements may interfere with pension scheme contributions etc. would the employer or government not allow employees of firms to be paid as LTD. companies?

So basically, when is it possible and not possible to have your earnings paid into your own LTD. company?

Many thanks

jtrader.

ps. Just to confirm, is stamp duty only paid in the UK when buying UK shares? and not paid when trading in and dealing from the UK in US shares, futures contracts, spot forex etc.?

How much more complicated is it to operate as a LTD company in terms of reporting/declaring your earnings, self-assessments, etc.? Is the proceedure different to a self-employed person paying CGT or income tax?
Do all LTD companies HAVE to produce an annual financial report? and if so, does this annual financial report have to be produced by a qualified accountant?

Thanks again.
 
Last edited:
jtrader said:
Hi

I'm specifically talking about taxes and operating in the UK here.......

The differences and advantages-disadvantages between paying capital CGT or income tax do not seem obvious to me, based on the above information. Although there are different tax free allowances amd different rates of tax apply to the different earning levels, to me it looks like the two types of taxes would roughly equate to the same ball park figures on a persons earnings at or above £33k, by which point the top rate of 40% would be applicable within both taxes.

However, the advantages of setting up as a LTD. company and thereby paying corporation tax seem enormous. No 40% tax rates on profits above around £32k, with low tax rates of 23.75-19% on profits between 10-300k :eek: .

Can anyone set up as a LTD. company or does companies house or some other body need proof that your reasons for doing so can be reasonably justified?

How much does it cost to register yourself as a LTD. company?

When I worked for the local councils Education Services, I remember a couple of instances where supply teachers who get higher rates of hourly and daily pay than contracted teachers, who worked on an ad-hoc/non-regular basis, set themselves up as LTD. companies.
Similarly, is it possible for employees of organisations to register as LTD. companies, and be paid into their own company account by their employer? Here are a few examples.

Footballer with £4 million annual salary? with additional £4 million income from sponsors and endorsements?

Politician with £200,000 annual salary? with £800,000 additional income through writing newspaper columns?

Company finance manager, annual salary of £70,000?

Company producation manager, annual salary of £40,000?

Or, because such arrangements may interfere with pension scheme contributions etc. would the employer or government not allow employees of firms to be paid as LTD. companies?

So basically, when is it possible and not possible to have your earnings paid into your own LTD. company?

Many thanks

jtrader.

ps. Just to confirm, is stamp duty only paid in the UK when buying UK shares? and not paid when trading in and dealing from the UK in US shares, futures contracts, spot forex etc.?

How much more complicated is it to operate as a LTD company in terms of reporting/declaring your earnings, self-assessments, etc.? Is the proceedure different to a self-employed person paying CGT or income tax?
Do all LTD companies HAVE to produce an annual financial report? and if so, does this annual financial report have to be produced by a qualified accountant?

Thanks again.
Click to expand...

Jtrader you are misguided.

A Limited Company is a seperate legal entity. It's monies are it's money not yours.
A Limited Company can be set up in a day for less than £50
Trading accounts and banking facilities will have to be opened in the Limited Companies name.
The Finance Bill 2006 is abandoning the 0% and 10% rates of Corporation Tax. All profits will be taxed at least 19%
However you still have to extract the monies after CT. There are several ways:
1) You pay yourself a salary and the Company is thus liable to Employers NICs and you are liable to Income Tax and NICs at 11%
2) You pay yourself in dividends/bonus issues thus there is no NICs to pay. You would need to pay some personal NICs so you get NHS healthcare and State Pension entitlements etc.
3) A mixture of Salary and Dividends which generally is the most effective way.

The benefits of Incorporation were worth about £3000 per annum, but maybe considerably less following Gordon Browns pre-budjet statement.

The figures quoted on CGT were also wrong as they failed to take into account any income earned which can mean the effective rate is 40%

HTH

JonnyT
 
Thanks JT

oh right, so the LTD companies money would currently be taxed at 19%, and if you pay yourself a salary, is it at a flat rate of 11% regardless of the amount?

What tax if any, is payable on top of the 19% corporation tax, if you do not pay yourself a salary, but pay yourself as the major shareholder, the profits in the form of dividends 1-2 times per year?

Many thanks

jtrader.
 
If you pay dividends then that money is classed as Income.

i.e. you pay Income Tax on the monies, which will vary depending on what other income you have. It is a little more complex than that.

Like I've said before incorporation would put around 3K extra into your pocket pre April 2006 and probably less post April 2006.

Another twist is that the Company could be classed as a Close Investment Company. Such Company's pay 30% Corporation Tax on all profits.

My view is that it is simpler to trade full time as an individual than it is under a Company.

JonnyT
 
Thanks JT.

Would an individual financial markets trader operating as a LTD company be liable to pay VAT? If so, what exactly would they be paying VAT on?............VAT – Value Added Tax is a government tax charged on certain transactions. Therefore presumably a LTD company would need to be selling a product or service to customers in order to warrant paying VAT?


Many thanks

jtrader.
 
Last edited:
http://www.freelanceuk.com/tax_matters/setting_up.shtml

Should I be Self Employed or a Limited Company?

To answer this question there are many different factors to consider but the one major factor that is likely to attract freelancers is the tax saving that can be made by trading through a Limited Company as opposed to becoming self employed.

The savings depend on profit, but this table gives an idea of the savings in tax and national insurance you are likely to make:

Annual Earnings / Total tax if trading with Ltd Co / Tax & NI sole trader / Saving

£20,000.00 £2,898.45 £4334.1 £1,435.65
£30,000.00 £4,798.45 £7334.1 £2,535.65
£40,000.00 £6,698.45 £10448.4 £3,749.95
£50,000.00 £10,697.59 £14548.4 £3,850.81
£60,000.00 £14,622.59 £18648.4 £4,025.81
£70,000.00 £18,547.59 £22748.4 £4,200.81
£80,000.00 £22,472.59 £26848.4 £4,375.81
£90,000.00 £26,397.59 £30948.4 £4,550.81
£100,000.00 £30,322.59 £35048.4 £4,725.81


What are the other advantages of being a Limited Company?

1. The “limited” part of a limited Company means that the Company’s liability to any creditor (someone you owe money to), is limited to the assets (cash, cars, equipment etc) that are in the Company. What this means is that should you get into financial difficulty with the Company, your personal assets (your house is usually the main one) will be safe.

The only exceptions to this are if you have given any personal guarantees for any lending the Company has (the bank will usually insist on this), or if you have taken more out of the Company than you were entitled to. This basically means that you have to keep enough money aside within the Company for your tax and VAT.

2. Public and customer perception is that a Ltd Company is a more substantial entity than just being a sole trader. You may find that this leads to the chance of bigger assignments or higher rates

What are the drawbacks:

1. Accountancy fees will increase. You can add on around another £500 a year minimum in additional accountancy fees

2. More regulation – as well as the Inland Revenue and the VAT office you will now have to deal with Companies House (your accountant will take care of this for you usually), and face stiffer penalties for missing any deadlines

3. Accounts visible by the general public (and of course your clients/customers). You will usually submit an abbreviated set of accounts to Companies House which does keep to a minimum the amount of information which is available for public record.
Click to expand...

Not sure when this information was published but the tax advantages do appear to be marginal if operating as a LTD company. Add to this the burden and extra responsibility of having to pay an accountant, greater regulation and stiffer penalties for accounting mistakes and you do begin to question if its worth becoming a LTD company.

One of the big advantages of operating as a limited company would remain being able to declare the company bankrupt without having any trading debts cross over to become personal debts and leading to personal bankruptcy etc...........

Cheers

jtrader.
 
Last edited:
One of the big advantages of operating as a limited company would remain being able to declare the company bankrupt without having any trading debts cross over to become personal debts and leading to personal bankruptcy etc...........
Click to expand...

I assume most brokerages will get you to sign a personal guarantee if you want to open an a/c in the name of a ltd co.
 
Jtrader, I doubt your suposition is true.

Limitation is not full. If a Director traded the markets and built up debts its fairly certain that the Limitation wouldn't apply as the Director has to only trade whilst solvent and not willingly abuse the system. In this case I'm pretty sure court orders would be obtained to seize personal assets.

As I said before you do not become a Limited Company. A Limited Company is its own legal entity with its own Shareholders and Directors.

I opened an account with IB for a Limited Company and no such condition exists. Any pukka broker wont let your account go into debt...

JonnyT
 
jtrader -
One of the big advantages of operating as a limited company would remain being able to declare the company bankrupt without having any trading debts cross over to become personal debts and leading to personal bankruptcy etc...........
Click to expand...

Having thought the above comments in light of your comments, trading the markets as a LTD company is a fairly unusual form of LTD company, and as you say, it would involve opening a broker account and trading directly through this broker account. So your losses would also be the brokers losses, who would seem unlikely to agree to write off your losses. Making financial markets trading a form of LTD company that perhaps cannot easily file for bankruptcy.

The subject of bankruptcy is interesting.........

Another form of LTD company such as a pizza shop may owe money to the bank in loans etc. Is the bank obliged to accept that the pizza shop (for example) that has invested heavily in leasing equipment and opening the pizza shop isn't making a profit, has run out of its available backing financial capital, nobody is interested in buying the business as it's a loss-maker in a remote location, and so the owners of this LTD company have no other choice but to file for bankruptcy?

Lets say that the directors of the pizza shop company rent the shop that they sell pizzas from.

Lets also say that the chip shop owners haven't actually bought any of their equipment, it's all rented, so the bank is not able to repossess any of the the companies material assets.

Perhaps the bank would have wanted very good evidence to suggest that the pizza shop venture would be a success before handing the loan to the pizza shop owners. However, success clearly didn't materialise. In the above circumstances, what do you think is likely to happen?

Many thanks

jtrader.
 
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If you are a serious Trader, you need to give thought to an Offshore non charitable Foundation and LLC.
Trading a LTD seems virtually pointless to me.

As for the question of bankruptcy. ..... You cannot harbour such thoughts and worry about tax at the same time. They are two different ends of the same straight line.
 
For UK traders offshore is not an option as all monies have to be declared unless you fancy a spell in Lincoln nick.

LLCs are US creatures similar to the UK Limited Cos

JonnyT
 
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