Self Employed Loop Hole

psmyth

A friend of mine works on a contractor basis for a large multi-national company in the UK. She has recently registered herself as a ltd company. This means that she no longer has to pay income tax as she is the managing director of her own company. She gets £10,000 allowance on which she has to pay no tax at all and pays I think 21% small business tax on everything else.

She earns more than enough to be in the 40% tax bracket and so avoids this completely. There are hundreds, if not thousands doing the same in just this one company so I don't blame her in the least but surely the government is losing out on billions through this method and another example of tax loopholes benefiting those who need them least.

Has anyone ever heard of this before and is this just accepted because it seems wrong to me!?!?

roger_c

See this link, which goes into a bit more detail, and you are right HMRC are losing out on millions if everyone is doing it, but it's not exactly a loophole that they aren't aware of...

http://www.hmrc.gov.uk/ir35/

Elaine_Wilson

It#s not quite as you described.

The company pays 21% on all it's profits. There is no tax free allowance.

If she draws out £37,400 as dividends she will not have to pay any extra tax. But she would only have paid 20% if she had earned this money directly.

The rest of the dividend will suffer tax of 25% of the net amount drawn out. There is little tax saving here.

The main reason for doing this is to save national insurance and this does add up to a sizeable sum.

zygurat789

psmyth wrote: »

Has anyone ever heard of this before and is this just accepted because it seems wrong to me!?!?

It's called income shifting and is the main reason why the rich are getting richer and the poor are getting poorer. It was, of course, a system devised by Gordon Brown to encourage entrepreneurism and reward the risk takers but everyone one else managed to climb on the bandwagon.
It also has other benefits wherever income details are required for means testing you can always deflate your income in one year and benefit in the next.
See also CGT which benefits those who can turn their income into a capital gain thus benefitting from a law which was meant to benefit those who sols businesses they had built up during their lifetime.

psmyth

Elaine - But can't you earn 10,000 profit without paying any small business tax?

Thanks for your thoughts - must admit I expected at least someone to stick up for the system but it's just plain wrong isn't it!!?

I understand the economic benefits if it did reward risk taking entrepreneurs, but she's got a contract and is an employee in all but name!

psmyth

Elaine - 25% on the rest of the dividend, she'd be paying 40% on wages, that's a pretty big saving in my book.

Rolo_Tomasi

psmyth wrote: »

Elaine - But can't you earn 10,000 profit without paying any small business tax?

It used to be the case (4-5 years ago) that companies did not pay any tax on the first £10,000 of profits but this is not so anymore. The cynical among us believe that the tax free £10k was a ploy on introduced to encourage the self employed to incorporate (where everything is more visible).

Don't forget that the company has paid 21% tax so this plus the 25% personal tax makes an effective rate of 46%!!

zygurat789

An employee grossing £75,000 nets £50,560.
A sole trader making a profit of £83,868 (£75000+ers nic 8868) nets £56813.
An LTD profit £83,868 gives a net income of £60,530.

psmyth

And there's no move to stop this happening! Like I said, I really don't blame individuals, one person can't be expected to take a moral stand against thousands, but the govt must know this is happening and they're losing out on millions, if not billions.

inmypocketnottheirs

psmyth wrote: »

And there's no move to stop this happening! Like I said, I really don't blame individuals, one person can't be expected to take a moral stand against thousands, but the govt must know this is happening and they're losing out on millions, if not billions.

Get a grip!!

There are far more problems costing this country billions!

If money wasn't squandered in so many other government departments, then we could all pay less tax.

I think your main gripe is, you can't do the same!

psmyth

but this one is costing billions as well, I'm not sure you've quite grasped why it's wrong.