Change in salary after tax year end - tax question

[Syntyrion]

Hi. Though I have been lurking for some time, this is my first post.

I have recently gone contractor after being permie for all my career. I have a tax question (I am not sure my current accountants are getting it right), so would be grateful if anyone knows (I don't really want to pay for two sets of accountants, and am kind of tied to the current lot for now).

I had a pretty well paying permie job but decided to leave that for some of the usual reasons. My taxable income (which includes some property rental income) for the year since April 2014 is (just) over 100k; I would prefer to take all the excess over 100k and stick it in a pension so as to avoid the "60% band", and not pay myself anything at all (salary or divs) until 6 April (living off savings, effectively).

The current (contractor) accountants have said that I am more likely to face an investigation from HMRC if I pay low/no salary now and then suddenly ramp it up to (around) £830 pm in the new tax year. However, I spoke with a friend who is an accountant (but not a "contractor specialist") and he reckons this is not correct, and that it would be fine to pay myself nothing until April and then start paying a salary and take some dividends.

Any thoughts / advice? Any experience of this happening?

Thanks.

[TykeMerc]

I'm not convinced by your accountants position, I don't think the scenario you've posted is spectacularly rare either.

Obviously it's all a matter of opinion, no-one has a crystal ball view of the future and it could be argued that your accountants are just being cautious.

[northernladuk]

Am sure everyone that has gone from permie to contractor has done this (if I am reading the scenario right).

Here is a search with similar questions...

https://www.google.co.uk/webhp?sourc...ntractoruk.com

[TheFaQQer]

The current (contractor) accountants have said that I am more likely to face an investigation from HMRC if I pay low/no salary now and then suddenly ramp it up to (around) £830 pm in the new tax year. However, I spoke with a friend who is an accountant (but not a "contractor specialist") and he reckons this is not correct, and that it would be fine to pay myself nothing until April and then start paying a salary and take some dividends.

Firstly, I'd ask the accountants what their basis is for that statement - they may know something that we don't, but I don't believe that to be correct. What happens to start-ups where they don't pay dividend or salary at the start and then do - are they all investigated?

Secondly, I'd ask the accountants what kind of investigation are they talking about being at higher risk. If they mean IR35 then I don't think there is any publicly available evidence to support that.

Thirdly, if you are doing everything right, and have protection in place (whether that is the insurance offering from Qdos or similar, or by being an IPSE member and having them fight your corner - the offerings are NOT comparable so make sure you know the differences if you are signing up to one of them), then so what?

The only problem I can see is that if you were inside IR35 then you have to pay it out as PAYE anyway, once you have deducted expenses. But if you're going to stick it all in your pension anyway, then the whole thing becomes a moot point - pension is an allowable expense.

[TheFaQQer]

Am sure everyone that has gone from permie to contractor has done this (if I am reading the scenario right).

Here is a search with similar questions...

https://www.google.co.uk/webhp?sourc...ntractoruk.com

I started my first contract at the start of April, so I didn't have any such issues. Plus, I was so underpaid that earning £100k+ a year permie wasn't going to be a problem.

[JRCT]

My first contract was a few months into the year and I'd earned around £25k from my previous perm role.

My accountant specifically advised me NOT to take a salary from my ltd (divs only) in that first year because I'd already used up my tax free allowance.

[Craig@Clarity]

Change in salary after tax year end - tax question

I think you'd be fine to hold off and not pay yourself anything until the new tax year. With your permie income, you'll have paid enough NI in this tax year to qualify for benefits in future if it came to it. Note that if you're a director of your own PSC, then you don't have to adhere to NMW. From a tax efficient point of view, you'd be ok to live off your savings, wait until 6 April 15 then start paying yourself salary/divi's etc.

IMHO, your accountant is being too cautious and painting you with the same brush as someone who hasn't just left a permie role and started up with a huge taxable income already. Ask them to advise you on "your" specific circumstance and plan your affairs to what your objectives are.

[Maslins]

Am sure everyone that has gone from permie to contractor has done this (if I am reading the scenario right).

That's what I thought. Loads of our clients did something similar at least with regards to not taking a salary for the remainder of the tax year that they start as a contractor.

[Syntyrion]

I think it might be related to also having them look into income shifting to the other half... I guess if MyCo has already paid at least one salary to each director (myself and the other half) then the horse has bolted and it would need to continue to do so? Or is that not necessarily true and we can just see that as a "once off" and have MyCo start paying it all later?

And how do I say to my accountants that "despite your advice, MyCo won't be paying salaries to myself and wife for the rest of the tax year"??

[Syntyrion]

...

The only problem I can see is that if you were inside IR35 then you have to pay it out as PAYE anyway, once you have deducted expenses. But if you're going to stick it all in your pension anyway, then the whole thing becomes a moot point - pension is an allowable expense.

I guess it's a question of how much I (have to) stick in the pension...