How workers across UK become 'companies' to cut tax rate to 20% - This Is Money

[PerfectStorm]

How workers across Britain are becoming 'companies' to cut their tax rate to 20%' | This is Money

All sounds very fishy.

Here's a question. Is there anywhere 'official' (i.e. HMRC published) that states that the contractor method of payment - basic allowance salary + dividends - is wholly and morally legit?

Or is it going to remain a more Jimmy Carr-style "I was told I could save tax legally, I now know this is wrong..." affair?

Or is the answer "it depends on your IR35 status"?

[moggy]

is there a more update version of that article?

[jmo21]

Here's a question. Is there anywhere 'official' (i.e. HMRC published) that states that the contractor method of payment - basic allowance salary + dividends - is wholly and morally legit?

It's how all limited companies work and so is perfectly legal.

HMRC don't like it though (our little 1 man co's), and brought in IR35 to try and "solve" it.

Morally legit? With the amount of tax shuffling big companies do, I sleep like a baby when it comes to my Ltd and I's tax affairs.

[tractor]

...

is there a more update version of that article?

Probably not but it raises a lot of questions and draws bad publicity to those of use who are legitimate businesses.

Of most concern in the article is

'and subject to consultation, requiring 'office holders/controlling persons who are integral to the running of an organisation' to pay income tax and national insurance at source.'

Questions such as why is a publicly funded organisation allowed to behave in this way and why are similar questions not being asked about the way extremely large multinationals structure their affairs as to make a small profit or even a loss for many years in succession simply to avoid paying corporation tax are arguably more important.

Probably because Margaret Hodge and her cronies are friends with one and still rankled over the other because IR35 fizzled effectively (except of course as a deterrent, but it doesn't seem to deter the Beeb much)

[LisaContractorUmbrella]

This is old news and what kicked off the storm in the public sector about people working 'off-payroll' - hence all the restrictions that you have now

[PerfectStorm]

Yeah, I appreciate the article is from 2012 but I ran a search and no one had posted it. The overall thrust of the article seems relevant to a lot of people here if you ignore the BBC aspect.

[Maslins]

Yeah, I appreciate the article is from 2012 but I ran a search and no one had posted it. The overall thrust of the article seems relevant to a lot of people here if you ignore the BBC aspect.

It's one of the reasons why I hate the term tax avoidance. Back in my studying days, it was crystal clear, tax evasion was illegal and wrong, tax avoidance was legal and perfectly fine. These days increasingly it seems MPs/the media are muddying the waters.

To my mind it's basically them giving up on legally being able to stop it, so they try to guilt people out of it on moral grounds. Problem is everyone has a different line on what's acceptable and what isn't. Eg putting money into an ISA is technically tax avoidance (only difference between it and a "normal" savings account is you don't pay tax). That's very much at the more acceptable end of the spectrum. Jimmy Carr type stuff (feel sorry for him, unfair he got singled out whilst many others left alone) is defo the other extreme. A contractor paying minimal salary with spouse as 50% shareholder with no other personal earnings is somewhere in the middle.

[tractor]

...

It's one of the reasons why I hate the term tax avoidance. Back in my studying days, it was crystal clear, tax evasion was illegal and wrong, tax avoidance was legal and perfectly fine. These days increasingly it seems MPs/the media are muddying the waters.

To my mind it's basically them giving up on legally being able to stop it, so they try to guilt people out of it on moral grounds. Problem is everyone has a different line on what's acceptable and what isn't. Eg putting money into an ISA is technically tax avoidance (only difference between it and a "normal" savings account is you don't pay tax). That's very much at the more acceptable end of the spectrum. Jimmy Carr type stuff (feel sorry for him, unfair he got singled out whilst many others left alone) is defo the other extreme. A contractor paying minimal salary with spouse as 50% shareholder with no other personal earnings is somewhere in the middle.

Exactly, in the same way as MIRAS, SIPPS, pensions and all the rest of the 'approved' schemes are tax avoidance. No one ever whines about those though.

[ASB]

Exactly, in the same way as MIRAS, SIPPS, pensions and all the rest of the 'approved' schemes are tax avoidance. No one ever whines about those though.

OT pensions. That industry has done a remarkably good job in explaining the tax saved. It is true. At the point of contribution.

For most people ultimately a pension will provide a modest tax saving (solely because of the 25% lump sum - which is always under threat). In reality, on the rest of it it usually provides for simple deferment. The output from the pension is taxable.

Certainly there are cases where the tax saving can be significant (and - depending upon circumstances the NI saving is definitely significant) but for the average joe chucking a few hundred in a month the tax savings will mainly turn out to be an overall illusion.

I'm not in anyway against pensions, but the taxation consequence are far from as simple as "hey I effctively get this lot tax free".

[TheCyclingProgrammer]

Very misleading as it suggests that Ltd co. contractors half their tax bills.

Corporation tax small business rate is 20%. Basic rate of income tax is the same. The main saving, up to the higher rate threshold, is on national insurance.

If you wanted to extract all of your net profit as dividends, then you're going to get taxed on 25% of your net dividends which, on top of the corporation tax equates to 40% of your gross profit before tax, again the same as higher rate income tax. So you're still only saving on NI.

Of course, the biggest advantage, tax-wise, is the ability to manage how much you pay more effectively, i.e. by only taking a small wage and dividends up to the higher rate threshold, assuming thats all you need to live on. There's also the potential advantage of ER on a capital distribution on winding up and sharing profit with a spouse or partner. But generally, if you need more money, you're going to pay almost as much in tax.