Salary/Dividend Level

[DSF70]

If you have been working PAYE since April, you will have used up a considerable amount (possibly all) of your tax free allowance.

might depend on your PAYE salary level, and how many months you worked under PAYE this tax year.

My accountant reckons I'll be due a refund when I complete my 16/17 self assessment, as my salary was in the higher tax band as a permie and therefore each month used a 1/12 of each band....and I'll ensure the rest of this tax year I'm paid a little as a contractor to keep me under £43k for the full year.

I've probably not explained that very well.

[Lance]

might depend on your PAYE salary level, and how many months you worked under PAYE this tax year.

My accountant reckons I'll be due a refund when I complete my 16/17 self assessment, as my salary was in the higher tax band as a permie and therefore each month used a 1/12 of each band....and I'll ensure the rest of this tax year I'm paid a little as a contractor to keep me under £43k for the full year.

I've probably not explained that very well.

so the situation is a little different. It's worth thinking about not paying yourself any salary at all until April. And take the £5k dividend that's tax free no matter what (assuming you have no other dividends from elsewhere).

In my first year I'd already crossed the 40% threshold when I started contracting so it was porridge and cold water for 4 months. I sold my computer, my phone, all my servers and printers to my company as well. That got me £3k. You must understand what items are classed as business expense and what 'wholly and exclusively' for the business means before you do that though.

Don't be tempted by a directors loan though (that's where the company lends you money) as using that just to defer taxable income to another year is frowned on by HMRC. Some say you're fine for around £5k but my accountant advised strongly against it.

[TheCyclingProgrammer]

so the situation is a little different. It's worth thinking about not paying yourself any salary at all until April. And take the £5k dividend that's tax free no matter what (assuming you have no other dividends from elsewhere).

In my first year I'd already crossed the 40% threshold when I started contracting so it was porridge and cold water for 4 months. I sold my computer, my phone, all my servers and printers to my company as well. That got me £3k. You must understand what items are classed as business expense and what 'wholly and exclusively' for the business means before you do that though.

Don't be tempted by a directors loan though (that's where the company lends you money) as using that just to defer taxable income to another year is frowned on by HMRC. Some say you're fine for around £5k but my accountant advised strongly against it.

There's nothing wrong with a directors loan although I agree it's not something you should really be considering when you're first starting out. This isn't a case of "frowned upon", the rules around directors loans are fairly straightforward:

* Loans up to £10k can be interest free with no BIK
* Loans above this amount should have interest charged at HMRC rates or you'll incur a BIK
* All loans must be repaid within 9 months of the end of the accounting year in which they were taken to avoid an s455 charge added to your CT bill.
* Any s455 charge will be repaid 9 months after the accounting year in which the loan is paid off.
* You need to be aware of bed and breakfasting rules when repaying loans, especially if you're trying to avoid the s455 charge.

[chopper]

The main bits of advice:

1) Every invoice payment that comes into your company account, put at least 33% into a business savings account. This is your VAT and Corporation tax money. Do not be tempted to spend it on things. This money is NOT YOURS.

2) Any money you pay yourself, make sure you put enough into a personal savings account to cover your tax liability. The dividends you pay yourself, you will need to pay the 7.5% (or more) tax on that yourself.

3) Do not treat your company's money as yours. It is not yours, it is your company's money. It only becomes yours once you withdraw it.

4) If you are married, make your wife a 50% shareholder. You can then take more money out more efficiently between you.

5) Don't spend all the money. You'll need it when you're looking for your next job.

6) Make sure your contract and working practices are outside of IR35 or it is all irrelevant - you'll pay the full whack of employee's NI, employer's NI and income tax on everything you earn - like a permie.

7) You are running a business. Understand what that means.

8) Assume your client can bin you off at a day's notice. You will not be entitled to compensation, or employment tribunals, or to be paid your contractual notice period. The lack of Mutuality of Obligation in an IR35-proof contract means they don't have to give you work during your notice period. No work = no timesheet. No timesheet = no pay.

9) You can put up to £40,000 per year into a pension fund. Don't do this (or at least only put a little bit in) until you have built up a mountain of cash that is yours or your company's, rather than the taxman's. You can make employer's contributions into a pension fund, this helps to reduce your corp tax bill.

10) Understand the 2 year rule for travel expenses. If you are outside IR35 and not using an Umbrella, you can claim your train/bus ticket/mileage and potentially your lunch until you know you will be at a single location for more than 2 years - i.e. your get a contract which takes you beyond two years in that location. This isn't single location as in single workplace for a single client, but generally same town/same city irrespective of how many different offices or clients inside that town.

11) If you are unsure or don't think you can trust yourself to save money, then use an Umbrella until you are sure.

12) Become a regular on here. Don't keep asking the same question that other people ask every day. Read the CUK Navigation bar. Ask your accountant things which you pay an accountant for - the advice on here is worth the money you pay for it. Know that NorthernLadUK will put you down. Know that he is simply an automatic responder from here NorthernladUK Comment generator

13) I get it. Your accountant or someone else will tell you something and you wont like the answer. And you'll ask it here. In some circumstances (e.g. how much should I pay myself?) your accountant will tell you something different to what someone else's accountant will tell them. Different people have different circumstances, with different daily rates, different family arrangements and live in different places.

14) Contracting isn't a way of getting out of paying tax on the money you earn. The tax landscape has been favourable towards contractors running legitimate businesses, but it will probably become less so as time passes. If someone calls you with a scheme that sounds too good to be true (e.g. keep 90% of your money), it is too good to be true, and when the tax man cometh it will be you needing the lubricant.

[missinggreenfields]

I agree with the majority, but...

4) If you are married, make your wife a 50% shareholder. You can then take more money out more efficiently between you.

That isn't necessarily true. If the spouse is already a higher rate taxpayer, then anything over the initial £5k divided will be taxed higher. If the spouse already has dividend income from elsewhere, then this is also something that needs consideration. Setting the level at 50%, which may suit your personal situation, will not suit everyone - it needs careful individual consideration rather than a blanket "make your wife a 50% shareholder and it'll be more efficient" line.

8) Assume your client can bin you off at a day's notice. You will not be entitled to compensation, or employment tribunals, or to be paid your contractual notice period. The lack of Mutuality of Obligation in an IR35-proof contract means they don't have to give you work during your notice period. No work = no timesheet. No timesheet = no pay.

Again, not true. You cannot assume with any degree of accuracy that the contract is the same and that there is no chance that your notice period will be paid - it might and it might not. The number of people I know who have not received paid notice exceeds the number of people I know who have been paid their notice period, but that number is not zero. It depends on the contract and the wording therein.

10) Understand the 2 year rule for travel expenses. If you are outside IR35 and not using an Umbrella, you can claim your train/bus ticket/mileage and potentially your lunch until you know you will be at a single location for more than 2 years - i.e. your get a contract which takes you beyond two years in that location. This isn't single location as in single workplace for a single client, but generally same town/same city irrespective of how many different offices or clients inside that town.

Not true - it depends on the journey. If you live in the centre of the town and client one is on the eastern outskirts, then if client two is on the western outskirts then the journey is different even though they are in the same town. Therefore, both locations are temporary, so the duration in the same town can easily exceed 24 months if the location is different.

[TheCyclingProgrammer]

Good post, a few points...

The main bits of advice:

1) Every invoice payment that comes into your company account, put at least 33% into a business savings account. This is your VAT and Corporation tax money. Do not be tempted to spend it on things. This money is NOT YOURS.

Even better...use online bookkeeping software like FreeAgent, Xero, Kashflow etc. (FreeAgent my preference) so you always have a clear picture of your tax liabilities...FreeAgent for example will do your payroll, VAT returns and give you a 99% accurate picture of your corporation tax liability. Don't rely on guesswork.

4) If you are married, make your wife a 50% shareholder. You can then take more money out more efficiently between you.

This really depends on what your spouse/partner earns. If they aren't in full-time employment, some share could be worthwhile but not necessarily 50%. If they are a higher rate tax payer then its not worth doing (not even for the £5k dividends she could get tax free IMO, as you'd probably need to look at something like alphabet shares to make this work).

[northernladuk]

Again, not true. You cannot assume with any degree of accuracy that the contract is the same and that there is no chance that your notice period will be paid - it might and it might not. The number of people I know who have not received paid notice exceeds the number of people I know who have been paid their notice period, but that number is not zero. It depends on the contract and the wording therein.

I think you are wrong to say not true. I more cases than not it is true. The contract does not allow for notice payments, in the few cases that get it paid it's through strong arming the agent. The contractual terms will often get them off. Your comments are right but to say 'It's not true' is a bit too black and white. It's a good position to start from and if you get paid it's a bonus, not an expectation.

Not true - it depends on the journey. If you live in the centre of the town and client one is on the eastern outskirts, then if client two is on the western outskirts then the journey is different even though they are in the same town. Therefore, both locations are temporary, so the duration in the same town can easily exceed 24 months if the location is different.

Again I think the 'Not True' is the wrong response. He did say generally so it will kick in in most cases in most towns. So it's only not true in certain cases, not black and white again. Taking a leaf out of your book I could say the East to West is OK is not true. The true answer is it is highly dependant on circumstances and is a very grey area indeed. I don't for one minute think changing from East Manchester to West Manchester would reset the clock. It's still in a geographic location. A permie would easily consider this a normal move so it would be difficult to argue the cost and distance are significantly different. IMO 10-20 miles is not significant when I work up and down the country. That would be a nice easy change. It's a hot topic, no one knows the answer but to say 'Not True' is incorrect.

[MrMarkyMark]

Again I think the 'Not True' is the wrong response. He did say generally so it will kick in in most cases in most towns. So it's only not true in certain cases, not black and white again. Taking a leaf out of your book I could say the East to West is OK is not true. The true answer is it is highly dependant on circumstances and is a very grey area indeed. I don't for one minute think changing from East Manchester to West Manchester would reset the clock. It's still in a geographic location. A permie would easily consider this a normal move so it would be difficult to argue the cost and distance are significantly different. IMO 10-20 miles is not significant when I work up and down the country. That would be a nice easy change. It's a hot topic, no one knows the answer but to say 'Not True' is incorrect.

I stopped claiming expenses two years after starting work in London.
I used to work in Hammersmith, then switched to other locations, then to Canary Wharf.

Didn't really seem worth it to me, travel costs are the least of my worries. In addition, I agree with NLUK, I didn't see the location as being different enough.

Obviously, everyone's appetite for risk is different.

[missinggreenfields]

I think you are wrong to say not true. I more cases than not it is true. The contract does not allow for notice payments, in the few cases that get it paid it's through strong arming the agent. The contractual terms will often get them off. Your comments are right but to say 'It's not true' is a bit too black and white. It's a good position to start from and if you get paid it's a bonus, not an expectation.

So it's not true, but it's only true in more cases than not. Glad you agree

Again I think the 'Not True' is the wrong response. He did say generally so it will kick in in most cases in most towns. So it's only not true in certain cases, not black and white again. Taking a leaf out of your book I could say the East to West is OK is not true. The true answer is it is highly dependant on circumstances and is a very grey area indeed. I don't for one minute think changing from East Manchester to West Manchester would reset the clock. It's still in a geographic location. A permie would easily consider this a normal move so it would be difficult to argue the cost and distance are significantly different. IMO 10-20 miles is not significant when I work up and down the country. That would be a nice easy change. It's a hot topic, no one knows the answer but to say 'Not True' is incorrect.

Again, glad we agree - it's not true in certain cases

Although your Manchester example is wrong - if the journey is significantly different, then you claim it. Show me ANY legislation or HMRC guidance or case law which says differently. If the journey is significantly different (and travelling in completely different directions is, IMHO, different) then they are temporary locations. I don't for one minute think that changing direction completely wouldn't reset the clock - show me something where a completely different journey doesn't reset the clock.

[northernladuk]

So it's not true, but it's only true in more cases than not. Glad you agree



Again, glad we agree - it's not true in certain cases

Although your Manchester example is wrong - if the journey is significantly different, then you claim it. Show me ANY legislation or HMRC guidance or case law which says differently. If the journey is significantly different (and travelling in completely different directions is, IMHO, different) then they are temporary locations. I don't for one minute think that changing direction completely wouldn't reset the clock - show me something where a completely different journey doesn't reset the clock.

Significantly different is in duration or/and cost. 10 miles east switch to 10 miles west is neither. The journey is the same.

It's still not clear and still leaves room for argument but from the

Changes to a workplace
4.6
An employee’s workplace may change without significantly affecting their journey to
work. Where an employee moves offices from Cardiff to Edinburgh there is clearly
a change of workplace affecting the employee’s journey to work. But the position
is different if an employee moves to a new office in the next door building. In these
circumstances there is no significant effect on the employee’s journey to work and under
the tax rules there is no change of workplace.
This rule prevents employers from making small changes to the place where an employee
works to take advantage of the temporary workplace rules. Where there is no significant
change to an employee’s journey the rule operates to treat the 2 workplaces as being
the same.

Now this on it's own is a bit wooly but from it I take the like where there is 'no significant effect on the employees journey'. He sits in the car for 40 mins and spends a fiver on petrol. The direction is irrelevant... but reading on...

4.7
Sometimes it may be difficult to decide whether a change of workplace affects an
employee’s entitlement to tax relief.
The basic principle is that a change in the location or boundaries of a workplace will give
rise to a new workplace where the change has a significant effect on:
• the journey an employee has to make to get to work
• the cost of that journey

The bullet points make it much clearer. A 10 mile journery west changing to a 10 mile journey each doesn't meet either of those criteria. The only significant effect in your example is what he sees out of the window.