Tax burden of Contractor as Ltd Co.

ManicMum

Hello

my husband works in aviation industry as a technician on permanent contract but terms and conditions are being cut, including pay. He is fed up and looking at contracting positions.

However, would he be worse off as understand there is whole raft of taxes to be paid - corporation tax, national insurance contrbutions paid both by the company (one he sets up) for him and the tax and N.I he would pay himself as employee of the 'company'. Other contractors he has spoken to in the past seem to pay little tax but we are struggling to see how.

Can anyone shed any light on this and are there any legal tax breaks we could use? I know he can employ me as bookkeeper as I currently don't work.

Many thanks guys for your help.

Smiley82

Hi ManicMum,

Perhaps this would be better answered on a more specific forum.

I have always found www.contractoruk.com to be very helpful in getting information. There is a bulletin board (off the menu on the left side of the page).

But to give you a bit of an idea, it really depends on how much your Hubby earns.....and how much he would look at earning as a contractor. Contractor rates are usually higher, and this is to cover the additional NI and costs associated, as well as the fact that job security is very low.

As a general rule of thumb, you won't be much better off unless your hubby earns as least £20/hour as a contractor. And there is also the paperwork, tax returns and Companies House legislation to comply with, which can be quite complex.

I am currently contracting, as a Limited Company, and for me personally, I now pay approximately 25% tax, instead of 40% as an 'employee'. So it works for me, even if I do hate the paperwork (I really need to find an Accountant to hand it all over too!).

As a Limited Company, he will be responsible for paying himself a salary, which will be paid at a very low tax bracket. The remaining amount will come from a dividend payment, which is taxed at 21%. He will have to pay 'Employers NI and Employees NI and PAYE' on whatever he deems to be his salary.

The way that alot of people get around this, is by paying a ridiculously low salary, that does not attract and NI, or PAYE (basically paying at the Tax Free Threshold). I personally don't do this, as it makes it very hard to appear legitimate to the Inland Revenue should you ever be investigated, but off hand, I would think that that is how alot of people claim to be paying very little tax. If this is the case, the only tax payable is the 21% Corporations Tax, which makes for quite a big saving if you are usually a top income bracket earner (40%).

Okay, hope this has made sense, I'll subscribe to the thread incase you want to discuss it further

Premier_2

ManicMum - ensure your hubby doesn't fall foul of operating a Personal Service Company, commonly referred to as IR35.
If he does, any savings possible are probably negligible.

Smiley82

Good Point, IR35 has come in quite heavily recently, you need to ensure that any company is fully compliant, all contracts are compliant etc.

It does take effort to run it successfully, but the benefits can be significant if he is on a higher income.

tyllwyd

For what it's worth, if you are looking to take advantage of tax benefits, in my opinion you should definitely look at having an accountant rather than trying to do the book-keeping yourself if you don't have any specific knowledge. Obviously, you could do the day to day stuff, making sure you've got all the information recorded properly, but tax is fiendishly complicated so I'd get some help when it comes to the actual tax return.

ManicMum

Hiya

thanks for that folks. Some of the contracts are paying £20 an hour but some not and he probably wouldn't want to be doing too many hours (ie. 60 or 70) as I will need him back here at weekends for some semblance of family life. Then he would have to pay accommodation wherever he was working. Beginning to look not such a great option. Perhaps he could buy a camper van!

Flamin' 'eck. Not helped by living 500 miles from nearest family.

Smiley - why would revenue not be too happy about paying yourself a minumum wage if you are paying 21% tax on the dividend? Unless you a higher rate tax payer, then not paying much different in tax to normal employee are you? Sorry if this is stupid question.

is being a sole trader out of the question? Seems a simpler way of doing it.

Thanks

Elaine_Wilson

ManicMum wrote: »

Smiley - why would revenue not be too happy about paying yourself a minumum wage if you are paying 21% tax on the dividend? Unless you a higher rate tax payer, then not paying much different in tax to normal employee are you? Sorry if this is stupid question.

Hope I don't upset anyone by butting in here. ManicMum, it's not the income tax they're worried about. It's the national insurance that is payable on salary but not on a dividend. The employer's and employee's contributions together come to well over 20%.

mitchaa

I think he would have to be bananas to give up an employed job to take on contracting work especially at the moment.

The 1st to go in any company are the contractors, so if his employed hours are getting cut in his sector then its very likely other companies within the same sector will also make cut backs.

You mention no accomodation, well i suspect this alone would not make any move from PAYE to ltd company worthwhile.

Remember there is no holiday or time off pay, he is only paid the time that he is there. Usual entitlement is 6wks per year so whatever he earns pw, multiply it by 46 for the equiv yearly salary (It may not be that much better)

As a contractor they can get rid of you at a days notice so always wondering is not the best way to be thinking.

The guys that are probably paying little tax are probably doing so illegally, i know a few myself who are off the radar and keep 100% of what they earn. It will come back and bite them 1 day though.

chunky79

Smiley thankyou for the link, my OH and I have not long since set up a LTD company and are just learning what to do, as he is in the IT industry so we have to be careful not to be classed as IR35, we have lots to learn. we have got an accoutant so hopefully it will run smoothly but i like to know what i am doing so thanks again.

Any tips of avoiding IR35 would be very much appreciated, i am not getting out of paying tax we are going to be paying at 25% i think the accountant said, but will know once i have seen him this weekend

Smiley82

Quote:
Originally Posted by ManicMum
Smiley - why would revenue not be too happy about paying yourself a minumum wage if you are paying 21% tax on the dividend? Unless you a higher rate tax payer, then not paying much different in tax to normal employee are you? Sorry if this is stupid question.

Hope I don't upset anyone by butting in here. ManicMum, it's not the income tax they're worried about. It's the national insurance that is payable on salary but not on a dividend. The employer's and employee's contributions together come to well over 20%.

Not a worry at all, thanks for answering sooner than I was able to It's exactly what Elaine has said, if for example, an 'employee' of a limited company was paid an annual salary of £6400 (or whatever the tax free threshold is this year), it would attract no Employees NI, Employers NI or PAYE. Therefore if they were to then go and pay the remaining of their income in dividend payments (within the dividend thresholds), the only tax they will be responsible for paying is the 21% Corporations Tax. For many people, this is a significant drop in their tax bracket, and the government is not happy at people paying such a low salary.

A way around this, is to pay minimum wage, which is at least justifiable, and equates to about £10,000-£11,000 per year. The government contributions are then required on the £4,000 odd above the tax free threshold, but it is still quite a significant saving if you are a high tax bracket earner.

Hope this makes sense

Smiley82

Smiley thankyou for the link, my OH and I have not long since set up a LTD company and are just learning what to do, as he is in the IT industry so we have to be careful not to be classed as IR35, we have lots to learn. we have got an accoutant so hopefully it will run smoothly but i like to know what i am doing so thanks again.

Any tips of avoiding IR35 would be very much appreciated, i am not getting out of paying tax we are going to be paying at 25% i think the accountant said, but will know once i have seen him this weekend

Hi there and welcome to the world of Contracting! It's fun, albeit slightly uncertain in these times of 'economic crisis'. Hope the link proves helpful and that you are able to get some valuable information of the site.

IR35 is particularly prevalent in the IT crowd, so you definately have to be careful. Hopefully your Accountant/Job Agency (if you use one) etc are helpful with compliancy. Make sure that any contract he gets is IR35 compliant, and there are little things he can do to make sure that he looks better in the 'eyes of IR35' - right of substitution etc. It's outlined a lot better on the Contractors Forum.

Also, just little things like, paying your salary once a month, and dividends once a month (maximum!). Less frequently on the dividends if you can afford to be, but it's not the end of the world otherwise. Think of a 'normal' company and the number of dividends it pays, if you pay a dividend every week (and some contractors do!), then it hardly looks like you are running a company does it? The main thing is that the income you receive as a dividend - is in fact SEEN as a dividend payment. The complications with IR35 come about when they see that dividend as salary......

It's a really complicated area, and you've gone down the right track to get an accountant. 25% tax sounds about right, means your salary is likely to be low, but still attracting NI and PAYE contributions. The other thing to consider is (and this only applies if you're British/EU or a resident and able to claim benefits) that if you continue paying NI class contributions while employed as a contractor, you are eligible for benefits (JSA or something?) should you be unfortunately enough to end up out of work. Again - ask your accountant - if benefits and pensions apply to you, you need to make sure that you are paying enough contributions to maintain their levels of eligibility.

Hope this all makes sense...I feel like I'm rambling!

Post back if you want to discuss more, happy to help