New Starter - Looking for some basic advice

[newstarter]

Hi Folks,

Retired with pension after many years of being an employee, but have just set up a Ltd Co and won my 1st contract as a consultant.

A couple of quick questions if I may:

1. My pension already takes me into the basic rate band of tax, so is it worth taking a salary on top as this will risk going into higher rate tax band, and
2. If I don't take a salary but extract as much as I can via dividends (so income will be pension and dividend only)- will this attract an HMRC IR35 investigation, and,
3. My contract has a defined end date, so will this exempt me form IR35 as I have read elsewhere.

Finally - I have been contacted by email by some of these tax avoidance companies (we know who they are), and the help and advice from reading the posts in this forum has been invaluable - especially for a new starter like myself who is just setting out as a Ltd Co after many years as an employee.

Thanks in advance.

[Michael at BI Accountancy]

Hi,

Firstly well done on securing your first contract.

With regards to your queries;

1). Depending on the amount you receive via your pension it may (as others have said) be beneficial to pay Salary up to NI threshold. You should discuss this with your accountant.

2). There are lots of people who only pay dividends, there is no reason this will draw any attention from an IR35 point of view.

3). Having a end date does not "exempt" you from IR35 however it is a good indicator that you may be operating outside of IR35. Other factors such as Control, MOB and substitution must also be looked at when deciding your status.

Glad to hear you did not get sold into a 95% + scheme as so many have done before hand. My advice would be to get yourself a good accountant who can work with you to come up with the most tax efficient way (legally) of taking your money out of the company or investing it.

Regards,

Michael
Bright Ideas Accountancy

[mudskipper]

Hi Folks,

Retired with pension after many years of being an employee, but have just set up a Ltd Co and won my 1st contract as a consultant.

A couple of quick questions if I may:

1. My pension already takes me into the basic rate band of tax, so is it worth taking a salary on top as this will risk going into higher rate tax band, and
2. If I don't take a salary but extract as much as I can via dividends (so income will be pension and dividend only)- will this attract an HMRC IR35 investigation, and,
3. My contract has a defined end date, so will this exempt me form IR35 as I have read elsewhere.

Finally - I have been contacted by email by some of these tax avoidance companies (we know who they are), and the help and advice from reading the posts in this forum has been invaluable - especially for a new starter like myself who is just setting out as a Ltd Co after many years as an employee.

Thanks in advance.

From April, there will be an additional 7% tax applied to dividends, so you will probably be better off if you pay yourself a salary up to the NI threshold (£672 a month for 15/16). If you're over 65, there's no employee NI to pay, but salary over the secondary threshold would still be subject to employer's NI.

If you go into higher rate tax, you will have additional tax to pay whether or not you're taking salary or dividends.

IR35 is a lot more complicated than having an end date - read the guides ---> get your contract reviewed, be aware of your working practices, and take out some IR35 investigation insurance.

It's also worth noting that, if you're inside IR35, from April you will not be able to claim travel and subsistence expenses.

[minstrel]

1). Definitely sounds like you should leave the salary, from a tax efficiency point of view as you have other income over the personal allowance it makes sense to only take dividends.

Hi Michael,

Are you sure on this? If newstarter has pension income of say £30k, would it not be more efficient to pay salary up to NI threshold and then the rest as dividends? Paying dividends has the additional burden of the 10% dividend tax and CT and BR tax cancel each other out.

[Michael at BI Accountancy]

Hi Michael,

Are you sure on this? If newstarter has pension income of say £30k, would it not be more efficient to pay salary up to NI threshold and then the rest as dividends? Paying dividends has the additional burden of the 10% dividend tax and CT and BR tax cancel each other out.

Hi Minstrel,

I blame my response on Saturday night beers and skim reading!

You are correct based on the scenario above the OP and the Ltd would be better off tax wise (due to a reduction in Corporation Tax offsetting the personal tax). Although personal they would get more out of the company by only paying dividends on top of the pension they receive.

[minstrel]

I blame my response on Saturday night beers and skim reading!

[ASB]

On the assumption that the Pension Income exceeds your tax allowance then any salary taken from the company will be taxed, and of course combined income (however it is paid) may exceed the basic rate threshold which will result in extra tax.

Also if over 65 so NI is not payable by the employee, but is by the employer.

Assume 10k of corporate income. And pay 10k salary. There will be no CT; 20% income tax on the lot, and 13 odd % employers NI on the amount over the employers NI threshold.

If it were paid as dividend then there is the new dividend tax to pay, and of course CT.

So, the most efficient number is the point at which the marginal rate of NI on the paid salary hits the new dividend tax rate. (Which I can't be bothered to calculate but will be somewhere around 15k).

This is the reasoning to pay a carefully calculated salary (even though tax is likely to be paid on all of it).

An alternative or two.

- Do not pay beyond the calculated efficient salary. A few years down the line wind up and use ER - risky to assume it will still be available/possible

- Pension contributions can still be made. Indeed the lump sum can be attractive, then drawdown (taxed of course - if the money is needed)

Of course if inside IR35 then there is rather less choice. 95% of it is treated as income and taxed accordingly (whether actually paid or not). However pension contributions could still be made).

[WordIsBond]

Salary up to perhaps £8060 is certainly in view here.

OP says he is in basic rate band with his pension, but not in higher rate band.

Within basic rate band, salary up to £8060 will be taxed at 20% (Income Tax) but attract no NI, and will reduce Corporation Tax by 20%. Alternatively, you could just treat it all as profit, pay CT, pay a dividend on the net amount, and pay no IT -- but due to the dividend tax credit, you'd be reducing how much you can pay in the basic rate band. That's this year. Starting in April, the dividend (after £5K) would attract an additional 7.5% IT. So either this year or next year, it is to your advantage to pay £8060 in salary, up to the limit of the basic rate band.

If £8060 would take you into the higher rate band, you'll have to decide if you want to take income (and pay higher rate tax on it) at that level. If you want the money (and you are retired, why not take some money and enjoy it?), salary in the higher rate band but below the NI threshold will cost you 40% in Income Tax. Dividends at that level will cost you 20% CT and then IT on the dividend at 25% of the after-tax profit -- 20%. So a net 40%, either way, for this year. Next year, the IT on the dividend will cost you 26% net, so you would pay total tax at 46%. Next year, if you want to take higher rate income, and your NI free threshold takes you into the higher rate bracket, you should use salary up to that threshold. Obviously, next year you'll be able to take £5K in dividends tax free.

I don't think there is any scenario where it will make sense for you to take more than £8060 in salary -- unless you are inside IR35. Then, I'm not sure it matters, you'll pay tax on the deemed payment no matter what you do with your salary.