How I pay 12% Tax

[dude69]

Just done the sums on my tax burden. This is for me as a contractor, no dodgy expenses, just legitimate tax avoidance using an LTD paying me + wife with 50% shareholdings.

My Daily rate is £500
Weeks work: say 46

Total annual income ex VAT then:

£115,000

Total Income inc VAT + PAYE rebate:

£135,375

VAT payable (flat rate scheme + 1% discount):
-£13,845

Annual travel @ £7/day:
£1610

Staff salaries:

£10,070k/year (£5035 * 2 for me + wife)

Entertaining Staff:
£300/year (to me and my wife)

Other expenses (new laptop + computer hardware)

£1kish/year

Profit on company balance sheet:

£108,550

Corporation tax payable:

£20,624.50, @ 19% on £108,550

So I actually earned £115,000

And I received £135,375 - £13845 - £20,624.5 = £100,905.50

So I paid (115,000 - 100,905.5) / 115,000 = 12.26% effective tax - thanks to getting out £10k tax-free in salaries, VAT rebate on flat-rate scheme, and tax-deductible expenses. And then corporation tax is only 19% to start with.

Pretty much all the expenses would be incurred as a PAYE employee, but wouldn't be tax deductible. And there's nothing illegal about it. People with lower daily rates would have an even lower tax burden.

Of course if I pay out all the money in the company I'd have to pay 40% tax, but we can get about £70k a year between the two of us without paying any more tax on the dividends, as you get a basic rate tax credit haivng paid 19% CT.

For comparison, to get the same salary as a PAYE employee rather than the independent contractor that I am, then first

You'd pay £215 in 10% Tax, and £6,853 in basic rate tax on an annual income of £38,335: £7,068 income tax. Everything above this is taxed at 40%.
on income between £97 and £645/week would be 11% NI = £60.28/week
So in a year on £33,540 income, you pay £3,134.56 in employee's NI. Above this level is 1% NI. So on £38,335 you'd pay a further £47.95 in NI.

So on £38,335 you pay a total of £37.95 + £3134.56 + 7068 = £10,250.51

So that's £28,084.49 take-home.

So to earn £100,905.5 net on PAYE, you'd need to earn

((100,905.5 - 28,084.49) / 0.59) + 38,335 = £161,760

£160k is then my equivalent PAYE salary.

In reality I'd get about £60k.

Beats me why anyone would not be a contractor.

[Generalist]

How long you been operating this model? Assuming your contract(s) are outside scope of IR35, I think once you've done a tax return you risk coming under scrutiny by HMCE under the broader scope of small/service compay legislation, which aims to tax undistributed profits as if they had been paid. What about pension/NI etc?

If this works good luck but I think you are pushing it and storing up problems for the longer term. Unless your accountant recommended this in which case would he like a new client?

[dude69]

How long you been operating this model? Assuming your contract(s) are outside scope of IR35, I think once you've done a tax return you risk coming under scrutiny by HMCE under the broader scope of small/service compay legislation, which aims to tax undistributed profits as if they had been paid.

Not sure what you're referring to here: NCDR was abolished now you pay 19% on the whole amount. Is there something else?

[YNWA]

Entertaining Staff:
£300/year (to me and my wife)

Are you sure about this? or is this the Xmas party thing?

[dude69]

Entertaining Staff:
£300/year (to me and my wife)

Are you sure about this? or is this the Xmas party thing?

yes, the xmas party thing.

[Nixon Williams]

Nice attempt.

Assuming you are paying Flat Rate VAT of 12% in the first year, the VAT would be £16215.

No corporation tax is due on the PAYE rebate so a bit extra there.

Only 50% of the laptop would be offset against tax in the first year.

"Paying 12%" tax assumes you do not fall foul of the Revenue with regards to the section 660 legislation they are trying to inflict and assumes you only take dividends upto the higher rate thresholds.

Our friends at the Revenue have also been known to attack "larger" salaries paid to non working spouses.

Even if you were fully compliant with current rules and taxes AND took all the funds out you would keep 71.3% of the turnover (£115,000) leaving you with over £82000 to spend as you please and paying 28.7%in taxes. Not bad I would say!

[boredsenseless]

don't we just love people who come on here shouting about how loaded they are...

Go be smug elsewhere

[martinb]

Interesting....but....

You are not really comparing like with like. In the Ltd Co scenerio you are looking at Company money, in the PAYE scenario you're looking at personal money.

A couple of expenses you seem to have left out of the Ltd Co scenario
- accountants fee
- insurances

Also, some things you are likely to get as a perm not catered for in the Ltd Co scenario:
- pension contributions
- life insurance
- private health care

I also think 46 weeks working a year is an overestimate. There are about 250 working days in a year and in a perm job probably 25 days vacation, so more realistic to work on 225 days for a like-for-like comparison.

To make a fair comparison it would be better to assume you pay all Co. retained profit as dividends (and hence get taxed 40% on some of it). Then you are comparing what goes into YOUR pocket with both scenarios.

(Not suggesting that you actually would want to do this, but it makes a fairer comparison - and, of course, in the Ltd Co scenrio you have a choice about how/when you take payments, whereas in the employed scenrio you dont)

Nonetheless, an interesting comparison.

[tim123]

Out of interest, what does one have to do to get a daily rate of 500?

What I do, pays around 275. With the current client, getting that much was a struggle.

tim

[hyperD]

Out of interest, what does one have to do to get a daily rate of 500?

What I do, pays around 275. With the current client, getting that much was a struggle.

tim

2 contracts and a time machine

threaded