First contract - using pension to remove TAX/NI exposure

[whats]

Hi,

My main PAYE job brings in £85k.
I have a second job for a client in Europe which should bring in €45K (~£35k). I need to invoice in Euro. They are ok if I invoice as a sole trader. This is a permeant arrangement and should increase to €60k in 2018.

I’m not looking to do any additional consultancy work in the UK, or move from perm to contractor. But I can see the benefit of having my own company should I get asked to do adhoc work in the future. Expenses would be minimal.

As you can’t charge VAT in Europe I can’t benefit from Flat Rate Scheme (FRS).

Obviously I want to minimise my income tax and NI exposure.

My primary job only pays the minimum into a pension (auto enrol) which comes to £365 for 2015/2016 so I thought dump the £35k into a pension.
It’s pretty clear the income tax relief you get from a pension, but I can’t say the same for NI.

I’m thinking the simplest thing is to set up as a sole trader, now would that avoid having to pay NI class 4 (9% on profits between £8,060 and £42,385)? If so my tax/NI exposure would be £0.

If you think I’ve missed something fundamental please let me know.

[DallasDad]

You can clearly afford to pay an IFA, go and talk to one first.

[northernladuk]

You can clearly afford to pay an IFA, go and talk to one first.

IFA? Don't you mean accountant?

[SueEllen]

You can clearly afford to pay an IFA, go and talk to one first.

He should talk to an accountant to see the best way to minimise his tax, and then if he has no idea what pension to pay into he should talk to an IFA.

[Fred Bloggs]

Salary sacrifice a significant chunk of your staff salary into your pension to save the EE and ER NICs. HTH.

[WordIsBond]

If you think I’ve missed something fundamental please let me know.

Perhaps several things.

1) Liability. As a sole trader, you are personally liable if anything goes wrong. With a limited company, your personal liability is limited to the share capital. That said, depending on what your role / industry is and other factors, you might be fine on the liability front with a high level of professional indemnity cover.

2) NI. As a sole trader, you have to pay NI on your profits even if you pay the money into a pension. Given your employment income, maybe you can defer Class 4 NI. But I don't know the rules on this. You may decide the NI is better than the cost of an accountant and the regulatory complications of a limited company.

3) In 2018, if what you anticipate is correct, your self-employment income will exceed the pension contribution limits. Any excess income over that will be taxed at 40%. If it goes into a limited company instead, the profit is subject to 20% corporation tax and then can be paid out as dividends, with the first £5K tax exempt. If you are happily married, you can gift your spouse half the shares and you can combined take a full £10K tax exempt.

4) Just be aware that IR35 is in flux and if this is a permanent engagement, you could have an issue here. Doesn't typically apply to sole traders as things stand today (there's no "intermediary"), but the fact remains they want everyone in PAYE. And the current discussion on public services contractors says that the deemed payment is to be calculated by the engager without regard to pension contributions. So you'll want to keep an eye on this one.

5) If income (including salary, self-employment profit, and all pension contributions) keeps increasing and breaches £150K, your pension contribution limits will be reduced.

I suspect you are going to want a Ltd company when your contract breaches the £40K pension contribution limit, in 2018. At your levels of compensation, I'm guessing you have contacts and if you have your eyes open you'll have opportunities to pick up ad hoc stuff here and there. From what you've said, which is obviously far from complete, I'd be inclined to go limited company, since you are almost certain to want it later anyway.

And I'd invest in advice from an accountant. I think you can afford it. I would not go to the contractor specialists most recommend here. Your situation is different.

[DallasDad]

IFA? Don't you mean accountant?

Yes absolutely I was thinking IFA for just the pension bit.

[whats]

Little update.

I don't think it's that well documented (took me a while to find) as a sole trader pension contributions isn't an expense (it would be if I employed someone) so I would be stuffed with NIC class 4 for personal contributions.

Now I'm down the LtdCo route. Quite happy about it actually as I'm getting advice and can do my paid job - rather than trying to be part time accountant

On the face of it my initial plan is ok, salary sacrifice towards pension scheme. Now I just need to sort that...

[mudskipper]

Little update.

I don't think it's that well documented (took me a while to find) as a sole trader pension contributions isn't an expense (it would be if I employed someone) so I would be stuffed with NIC class 4 for personal contributions.

Now I'm down the LtdCo route. Quite happy about it actually as I'm getting advice and can do my paid job - rather than trying to be part time accountant

On the face of it my initial plan is ok, salary sacrifice towards pension scheme. Now I just need to sort that...

As in WIB's point 2...

Don't forget that you can carry the contribution limit from previous tax years forward, so can probably contribute > 40K limit if necessary. But as others have said, take professional advice.

[WordIsBond]

As in WIB's point 2...

It's always nice when SOMEONE notices my brilliance. If no one notices, I always do point it out, of course, but not because I'm egotistical. It's only as a public service, because I'm such a nice person. What WOULD the world be like without me, one wonders?


OP, in my point #2 above I also noted the possibility of deferring Class 4 NI. I don't know the rules on that, but I >suspect< that your PAYE income (and the NI paid on it) is sufficient that you wouldn't have to pay Class 4. If that is your only reason to go Ltd, it is probably unnecessary, and can be handled another way.

This is all a moot point if you want to go Ltd for other reasons, of course, which seems most likely the best option for other reasons.