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

[PerfectStorm]

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.

But surely you have to take the profits out as dividends sooner or later... so they're always going to be taxed the same whether you take them out every month as they come or at a later date?

[jmo21]

But surely you have to take the profits out as dividends sooner or later... so they're always going to be taxed the same whether you take them out every month as they come or at a later date?

Year 1 - work all year, rake in all the cash into company account. Pay small salary, all qualifying expenses, pay divvies up to upper threshold.

Year 2 - do not work at all, company uses retained profit from last year to pay small salary, all qualifying expenses, and divvies to upper threshold.

That's the most extreme example, and obviously misses out a few things, and not many will do it that way, but you get the idea.

[TheCyclingProgrammer]

But surely you have to take the profits out as dividends sooner or later... so they're always going to be taxed the same whether you take them out every month as they come or at a later date?

As jmo says, they may all come out at basic rate if you run out of work and need to dig into your war chest.

Or you might call it a day and extract your retained profit at a very appealing rate of 10% as a capital gain, assuming you qualify for ER.

But yes, in most cases, some of that profit is going to have to come out at a higher rate eventually if you need the money for something (eg I recently took a larger dividend to cover a house purchase deposit which means higher rate tax to pay).

As I said, the biggest advantage is not a direct tax saving, but tax planning and flexibility.

Contrast with a sole trader who gets tax on all of their profits in a year regardless of how much they actually need to live on.

[TheFaQQer]

But surely you have to take the profits out as dividends sooner or later... so they're always going to be taxed the same whether you take them out every month as they come or at a later date?

No.

Year 1-5 take little salary or dividend. Year 6, shutd own the company and go and do something else with no intention to return contracting, so you take the ER at 10% instead.

Or year 1 take money up to the higher rate threshold. Year 2, work for three months and use retained profit to pay dividends and salary up to the higher rate threshold.

Etc.

[VectraMan]

As I said, the biggest advantage is not a direct tax saving, but tax planning and flexibility.

Contrast with a sole trader who gets tax on all of their profits in a year regardless of how much they actually need to live on.

I'd be happy to see a middle ground: keep the ability to pay tax only on what you pay yourself when you pay it (and so have the tax planning and flexibility), but do away with the NI saving so you pay the same amount of tax as everyone else. I.e. recognise that you're a business.

[Craig at Nixon Williams]

This is a sensationalist article, written by the Daily Mail – not an organisation that I would look to when making financial decisions. In their example they compare a salaried employee earning £100k with a PSC with a turnover of £100k – according to this the only tax paid by the PSC would be £20k in Corporation Tax and that the remaining £80k is untaxed, obviously they do not understand the entire picture.

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"?

IR35 is essentially where the line is drawn with HMRC - the goal of IR35 is to ensure that people who would be an employee in the absence of the PSC pay tax as if they were an employee (whether this is achieved or not is a different discussion).

Politicians and the media seem to distort the line between tax avoidance and tax evasion –I guess that politicians will hope that this will in some way boost revenues to the exchequer as it will put doubt in the minds of many people.

[eek]

so the next drip drip from HMRC has arrived. Next will be the FTC company type (finance bill after the election) and the HMRC agency reporting regulations which will mandate the reporting of all payments from an agency to a worker / company directly...

Of course there is nothing to see here because IPSE have negotiated an opt out

[tractor]

...

Please stop talking about PSCs there is no definition of a PSC in tax or any other law. It was a phrase dreamed up by NL and HMRC to define a section of business that they wanted to treat differently. To be fair there were lots of examples that did need addressing, not least the BBC itself and even more recently, other government departments and their creative accounting.

[TheFaQQer]

Please stop talking about PSCs there is no definition of a PSC in tax or any other law. It was a phrase dreamed up by NL and HMRC to define a section of business that they wanted to treat differently. To be fair there were lots of examples that did need addressing, not least the BBC itself and even more recently, other government departments and their creative accounting.

Sadly, the politicians have no issue with the wording, though.

Chris Bryce (PCG CEO): PCG members generally operate through their own limited companies. Like Mr Ramsden, PCG has some difficulty with the term “personal service company”.
Baroness Noakes (Conservative, Chairman): It is a term that is much used, so I am afraid we are going to carry on using it.
Chris Bryce: It is indeed...

(Linky - see page 315)

[eek]

Sadly, the politicians have no issue with the wording, though.



(Linky - see page 315)

That's fine as its not defined in law and therefore my company cannot meet the definition of it.