Soldato
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Hence the recent changes to tax on dividends to try and stop this.
Advice request: Starting limited company
- Thread starter Dirk Diggler
- Start date
Hence the recent changes to tax on dividends to try and stop this.
In Aberdeen/the oil industry it's quite common for people to work as contractors via limited companies, often working for single company/having a single client for 1+ year at time and I've never really heard of people having issues with HMRC.
Obviously you need to be aware of IR35, but as long as you're sensible you should be ok (although this does seem to be changing with the HMRC/government looking at it, but their general feedback is that it's hard to introduce rules/legislation that just affects ltd companies with single directors rather than other small businesses as well).
They all seem confident that this wont really impact them at all. The reference above about loans seems to be the general direction that people are heading in. Long term loans from company to directors which are written off after 7 years at the discretion of the trustee and don't incur a tax charge. Just criminal imho
Sorry OP - didnt mean to hijack your thread.
I thought director loans had quite strict rules? http://www.contractoruk.com/limited_companies/how_take_loan_my_limited_company.html
People also forget that when you have a limited company and pay yourself a minimal salary and dividend is that the dividend is effectively taxed twice. Your company pays corporation tax on its profits and then you're taxed on the dividend (which comes from the company profit) as well.
Due to the increased earnings of contract roles vs a staff position you can actually end up paying more tax even though the effective tax rate is less.
Why does it annoy you?
I would honestly avoid doing it yourself. Use an accountant/tax advisor. Go for one that uses software like FreeAgent or Clearbooks as it is great and gives you much more control. Prices are around £85 - £95 a month.
If you do it yourself, you will miss something. You need to complete VAT, Payroll, pension, self assessment, corporate tax, annual stats, etc. Too many rules to keep track of yourself.
If you do it yourself, you will miss something. You need to complete VAT, Payroll, pension, self assessment, corporate tax, annual stats, etc. Too many rules to keep track of yourself.
I have my own accountancy business and the new budget announcement has really hit the contracting sector hard so definitely be aware of the pending changes!
Speak to someone local, the online guys are ok but are more of a conveyor belt approach. We would charge around £500-600 for accounts and payroll to give you a ball park figure for comparison.
Speak to someone local, the online guys are ok but are more of a conveyor belt approach. We would charge around £500-600 for accounts and payroll to give you a ball park figure for comparison.
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Don't forget your payrise when you get your child benefit back /runs
Taxed twice maybe but at much lower rates plus national insurance is avoided.
You will never pay more tax paying corporation atx and then tax on your dividends compared to paying it through PAYE. Take a limited company with say £50,000 profit.
If all paid as salary then income left would be £34,200.
If paid as a combination of salary and dividends (£7,956 salary which is the limit for employee NI to start) then the income left would be £40,800.
Total gain is £6,600 so about 13.2% tax and NI saved.
New rules coming in 2017 means this gap is reduced by 7.5% so the gain will only be 5.7%. Against that you have to weigh up any additional costs you may have for running a limited company. Clearly no point having a ltd company and earning £30k from 2017 and saving £1,710 in tax so then have accountants bills costing more than that.
Plus corporation tax is not due until 9 months after your year end so you can earn some interest on that money for a while as well.
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Taxed twice maybe but at much lower rates plus national insurance is avoided.
Take a limited company with say £50,000 profit.
If all paid as salary then income left would be £34,200.
If paid as a combination of salary and dividends (£7,956 salary which is the limit for employee NI to start) then the income left would be £40,800.
Total gain is £6,600 so about 13.2% tax and NI saved.
New rules coming in 2017 means this gap is reduced by 7.5% so the gain will only be 5.7%. Against that you have to weigh up any additional costs you may have for running a limited company.
Plus corporation tax is not due until 9 months after your year end so you can earn some interest on that money for a while as well.
I agree with what you're saying, my point was that what you gross from contracting can be significantly higher than an equivalent staff role and hence you could pay around the same amount of tax or more however you'd net significantly more.
I definitely agree going contract/ltd company is more tax efficient and gives you far more flexibility.
Not necessarily. Having one client is defendable. One way to look at it is that you stay with one client going from project to project because it’s repeat business: you've done a great job for that client and they want to continue using you.
However, you are far more likely in to incur a full HMRC IR35 investigation should you be a single employee limited company working just for one client and you will find it much harder to defend.
However, with the cut backs and staff shortages at HMRC, the odds of you even been looked at are pretty slim. There are now over 600,000 one man limited companies out there. From the peak of enforcing over 1,000 cases per year back in the early 2000's the HMRC are only managing to enforce IR35 on less than 20 companies per year now. Thats 0.0038%.
And I am not up with current fining rules with HMRC so I am unsure that even if they ruled that you should be an employee, whether there is just the back tax and NI to pay with no fines on top.
To be fair you do need that extra rate as you will have to fund your 5.6 weeks holiday per year (or more) plus sickness. So you probably need at least 15% more as a contractor than a staff role as minimum. Throw in pension and redundancy and other rights and it soon increases.
My gf used to contract and earnt £90k per year compared to £56k when she was salaried in the same position. She used to pay an affective rate of tax around 10 or 11%.
I view it as stealing plain and simple, making use of tax loopholes and going against the spirit of the law to pay less tax.
edit - also its really only available to people that already earn significantly above the national average salary anyway, I cant imagine that many companies will be willing to let their staff earning £20k incorporate as a legal entity. Its just another way to make the middle class even richer.
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I've been PAYE all my life, but this is just nonsense to be honest.
Ask yourself why you pay more tax than a company director or any other entity that earns money in this country.
What is this spirit of the law of which you speak? Laws are there to be adhered to, so if a law indicates that a certain (accounting, in this case) action is legal then thats all that really matters. If the government want to make such procedures illegal, then that's fine too.
The directors of every company that I work for (all FTSE 100 companies) are paid through PAYE and incur hundreds of thousands of tax charge every year.
Im genuinely quite annoyed that you can think that paying your fair share of tax is nonsense. I know its just the internet and it doesn't matter but I struggle to comprehend thought process.
But not good when even the Head of Student Loans, Ed Lester did exactly that via a limited company and saved himself £40k per annum from his tax bill
And they arent exactly loopholes. Its just the law. Could be changed easily. Just that nobody wants to.
And the more you earn the easier it gets. Take those footballers you see paid stupid wages. A lot of people feel upset at them getting paid £200k a week. Even worse if you know that they then hardly pay any tax on those wages.
What you do is set up a company in a nice tax haven. Your headline contract with the club is say for £10m per annum salary. What you actually sign is a contract where you get paid say £100k as wages and pay the local uk tax on it. The other £9.9m is paid as an appearance and image fee to your offshore holding company which owns the appearance rights to you.
You might pay a huge amount of money to accountants to set it all up for you but worth it compared to the £4.5m tax you should have paid.
mohamed al fayed earns about £7m per year and pays about £700k in tax so around 10%. He might pay a firm of accountants £1m to get those savins but well worth it.
Human nature means it will never change. I have never met a rich client who was happy at paying the "normal" rate of tax. You should hear how much they complain when paying themselves £1m a year and you tell them their tax bill is going to be £140k. You get the "****** robbing ******* government" all the time.
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Douglas Bader disagrees.
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You're too niave for your own good.