Can I retain profits within the company if I'm working inside IR35?

[Paul78]

I'm currently working through my own limited company on a contract inside IR35.

I'm a higher-rate taxpayer and I'm already maxing out my pension contributions. I'm getting close to retiring and in a few years I plan to be retired or semi-retired; either way I will definitely be a lower-rate taxpayer.

Even though I'm inside IR35 the company still makes a small profit (from the 5% expense allowance, which exceeds the actual expenses) so I'm paying myself a small dividend every year at the moment. I am thinking about changing the company dividend distribution policy to not pay these dividends and retain the profits within the company. That way I can pay myself the accumulated profits (which will be in the low tens of thousands at most) as a dividend in a few years when I'm a lower-rate taxpayer. As I understand it, that will save me 32.5% tax on the dividends in return for waiting a few years to get my hands on the money.

Is my reasoning correct, and there is a potential tax saving to be had here?

Am I right in thinking that being inside IR35 just forces most of the company earnings to be treated as salary, it doesn't impose any additional restrictions on what can be done with the small amount left over?

Is this legal? Even if it is, are HMRC likely to get upset about me doing this?

Cheers.

[malvolio]

Of course it's legal. Why wouldn't it be? You're under no obligation to pay taxes that aren't due, and taking a 40% hit (OK, 32.5% after CT...) on earned income that you don't need is just a little silly.

The biggest screw up with IR35 is that it prevents you using YourCo for its other main purpose (the first being limited liability), that of smoothing your income over an erratic earnings cycle.

[TheCyclingProgrammer]

So long as you're operating IR35 correctly then I can't see why you can't do what you want from the small profit you make from the expense allowance.

It certainly sounds like leaving it in the company of you don't need it right now would make financial sense. Treat it like a small growing warchest

[BlasterBates]

Sounds like a good idea. I believe that would be referred to as tax mitigation.

i.e. perfectly legitimate, something you could talk openly with the tax inspector and he could only nod in agreement.

[ASB]

You mention pension. If your contribution is personal consider making corporate contribution. No ni and still chargeableas an expense within ir35 caught scenarios.

[Paul78]

Thanks all

Positive feedback much appreciated guys.

ASB - good advice, I am already making the pension a corporate contribution fortunately.

Cheers!