Working both perm and contracting - best payment method

[Hobosapien]

No need for PAYE via Ltd for contracting while also a permie on PAYE. I'm no longer on my Ltd PAYE scheme while contracting via an umbrella, to keep it simple and avoid unnecessary taxation.

As for income you earn the Ltd from contracting, depends how much you need while also part time permie. If you can get by on the permie wage only then just leave the contract income in the Ltd and pay corp tax, then decide best way to get at it when you know how much you need. You could go PAYE via Ltd after permie job ends or take divi or other option (as per an accountant's advice) in meantime if you need at it.

[Darren at Fox-Bartfield]

Dividends

Not much point in paying out extra in terms of an additional salary through the company. You'd end up paying basic rate tax on the full whack even if keep it at the NI threshold.

As Alan say, look at pensions for a bit of tax efficiency and anything you want out, pay by way of divi's. Suggest a bit of planning as well to see what you need to take out and potentially keep the total income below the higher rate threshold if you don't need the funds to be extracted.

[ContrataxLtd]

I'm going to stick my neck on the line and disagree with the other guys here and saying that if you are purely looking at tax efficiency a salary to the NI threshold is probably the way to go with the rest as dividends, restrict total income to the high rate threshold if possible and throw extra funds into a pension if that suits.

There are a few assumptions here but by paying a salary you are potentially about £550 better off overall, although you would probably have less to spend 'in your pocket' with more retained in the company compared to the dividend only route.

Martin
Contratax Ltd

[TheCyclingProgrammer]

Remember if you just take dividends, everything above the £2k threshold will be taxed at 7.5% AFTER having already paid 19% CT on the profits.

Whereas the salary up to the NI threshold and below the higher rate threshold will just incur 20% income tax.

So I’d say you’d want to take dividends up to £2k and salary up to the NI threshold as a minimum, then dividends if you want any more. But leaving profits on the company might not be a bad option. No need to pay higher rate tax unless you really need the money now and you’ll start building up a warchest which will be useful if you decide to go contracting full time.

[NotAllThere]

None of my business - I'm just curious.

Why is this? He'll already be paying tax and NI on the 26K salary so any salary taken above that will attract tax and NI at the applicable rate. NI will be unavoidable won't it?

NI is per employment. Not like tax where it all gets added together.

[WordIsBond]

I'm going to stick my neck on the line and disagree with the other guys here and saying that if you are purely looking at tax efficiency a salary to the NI threshold is probably the way to go with the rest as dividends, restrict total income to the high rate threshold if possible and throw extra funds into a pension if that suits.

There are a few assumptions here but by paying a salary you are potentially about £550 better off overall, although you would probably have less to spend 'in your pocket' with more retained in the company compared to the dividend only route.

Martin
Contratax Ltd

Another reminder that if/when I go looking for an accountant Martin will be one I'll call. (Not the only one, but definitely on my list). Ask an accountant to run the numbers for you, but here's the basic idea:

If you pay £702 salary / month, you will be paying Basic Rate Income Tax (20%) of £140.40 / month for a take home from that £700 of £561.60. No NI will be due.

If you don't pay that salary, you'll pay 19% Corporation Tax on the £702 (£133.38) for after tax profit of £568.62, then disburse it as dividends and pay another 7.5% dividend tax, for another £42.65 in tax, giving you take home of £525.97. I make that an extra £35 / month take home, which comes out to £420 a year. Martin made it £550, which means presumably I've got a number wrong somewhere, but the general idea is clear.

Every pound you pay in salary without incurring National Insurance is taxed at a lower rate than a pound taken as profit and paid in dividends. That's true whether we're talking about basic rate or higher rate income, so if your permie income pushes up to the higher rate band, and we're talking about whether you should still pay a salary even though it takes you into higher rate taxation, this still makes sense if you want to get the money out of your company.

Basic Rate taxation
Dividend Tax = After Tax profit (81%) * Div Tax Rate (7.5%) = 6.075%
Corporation Tax (19%) + Dividend Tax (6.05%) > Income Tax (20%)

Higher Rate taxation
Dividend Tax = After Tax profit (81%) * Div Tax Rate (32.5%) = 26.65%
Corporation Tax (19%) * Div Tax (26.65%) > Income Tax (40%)

Once NI kicks in that flips the equation, of course.

One other thought, if the combination of permie salary and salary from your Ltd (using the NI threshold) increases to close to the higher rate threshold, it MAY make sense to increase your salary to the higher rate threshold so that your £2K dividend "allowance" is in the higher rate band instead of the basic rate band. When you are into that territory you have things like the upper Class 1 threshold kicking in, too, so it is complicated, but it may make sense to pay a little extra NI to be able to bump £2K above the higher rate threshold in dividends without hitting dividend tax.

Of course, paying a salary does mean payroll reporting to HMRC, and you may decide it isn't worth it. But it would be more tax efficient, and that's the kind of thing you want your accountant to tell you, and quantify for you. Then you decide whether the work involved is worth the tax savings to you.

[Old Greg]

I think he might have figured that out already.


You should pay yourself NMW, and avoid any NI costs. Take whatever else you need as dividends - leave what you don't need in the company.

btw - I'm 50% employed and 50% contractor as well.

What is the advantage of paying NMW through the Ltd (or alternatively what is the obligation to do so)?

[RyanDS]

Many thanks for all the advice guys. Lots to look into.

Ideally I want to be leaving as much money in the company as possible to build up a warchest, the move here for me is to get out of office politics and improved quality of life as opposed to doing it for the money.

I just wanted to get my head around the worst case so I can plan accordingly.

[Hewitt Accountancy Ltd]

Just to close this thread off in terms of the tax impact. WordisBond is pretty darn close TBH.

Working with annualised figures:
Assuming you keep your overall earnings below the higher rate threshold, then taking a salary of £8,404 saves £8,404*19% = £1,601 of Corp Tax, and reduces the amount you have available to take in dividends from the Company by £8,404-£1,601 = £6,823.
The increased income tax on the salary is £8,404*20% = £1,685, and the reduced income tax on the lower dividends is £6,823*7.5% = £512.
so overall the net saving per annum is +£1,601 - £1,685 + £512 = £428.

It gets more complicated when the higher rate income tax threshold is breached. Then taking a salary of £8,404 saves £8,404*19% = £1,601 of Corp Tax, and reduces the amount you have available to take in dividends by £8,404-£1,601 = £6,823.
The increased income tax on the salary is £8,404*20% = £1,685. So far, all as above.
The dividend tax saving is more complex - you save basic rate div tax of £8,404*7.5% = £631, but now lose out on £1,601 taxed at the higher rate of 32.% = £520.
So overall the net saving per annum is +£1,601 - £1,685 + £631 - £520 = £27.
Using your figures and taking 2 salaries, the max div you can take and still save £428 is £11,926; after divs of £13,600 the saving has dropped to £27.

So yes, IMHO it is worth doing!

Hope that helps!
Cheers
Peter
Hewitt Accountancy Ltd

[northernladuk]

Just to close this thread off in terms of the tax impact.

Ooooh. Get the new guy. Closing threads off with his first post. Let's get this in General and see what he's really made of!!