Paying too much salary?

[Fred Bloggs]

Yes, you can reduce your salary and there will be no increase in premium. Please contact us directly so we can make the adjustment on your policy.

Thank you QDOS, that is very welcome news indeed and much appreciated. I will be in touch.

[Lewis]

Thinking about this some more, I don't think this is actually such a big deal. Consider paying £9.5K salary compared to £5K salary (and £4.5K dividend).

(1) £9.5K salary - total tax (PAYE, eeNI and erNI) is around £1780 (using online 2008/9 PAYE calc).
(2) £5K salary, £4.5K dividend - total tax is 21% corporation tax on £4.5K = £945.

However, being a bit more "real world", despite income shifting and keeping below the 40% tax bracket as much as possible I usually take home closer to 75% of my contract value each year. So being a bit more pragmatic leaving the £4.5K in the company it is probably going to cost -me- £1125 in tax (25% of £4.5K). So the saving is actually £655.

Now £655 is £655 there is no point giving it to HMRC but for that money you get two benefits.

(1) "Anecdotally" you are less likely to be investigated.
(2) You can keep in line with a lot of accountants recommendations to pay NMW. I know NMW doesn't apply to Directors but a lot of accountants seem to recommend paying that anyway.

My point is that although yes paying £5K salary is better. It's not quite as much better as I had initially thought before doing a few figures.

[THEPUMA]

Thinking about this some more, I don't think this is actually such a big deal. Consider paying £9.5K salary compared to £5K salary (and £4.5K dividend).

(1) £9.5K salary - total tax (PAYE, eeNI and erNI) is around £1780 (using online 2008/9 PAYE calc).
(2) £5K salary, £4.5K dividend - total tax is 21% corporation tax on £4.5K = £945.

However, being a bit more "real world", despite income shifting and keeping below the 40% tax bracket as much as possible I usually take home closer to 75% of my contract value each year. So being a bit more pragmatic leaving the £4.5K in the company it is probably going to cost -me- £1125 in tax (25% of £4.5K). So the saving is actually £655.

Now £655 is £655 there is no point giving it to HMRC but for that money you get two benefits.

(1) "Anecdotally" you are less likely to be investigated.
(2) You can keep in line with a lot of accountants recommendations to pay NMW. I know NMW doesn't apply to Directors but a lot of accountants seem to recommend paying that anyway.

My point is that although yes paying £5K salary is better. It's not quite as much better as I had initially thought before doing a few figures.

I don't quite follow the second bit of logic re the £1,125 adjustment but generally agree with the principle. It is not a huge amount of money because at £9.5K there is only £4K over the NI threshold.

However, there are a lot of people out there paying £15K or more in salary and they are the ones who would really benefit (to the tune of about £1,850 pa I reckon based on £15K gross salary).

£15K pa equates to 2,717 working hours. I would guess that most contractors work those sorts of hours in total once you take account of holiday pay, travel to and from your client and a bit of accounting/research etc in the evenings and weekends.

Whereas £9,500 equates to about 33 hours a week. There seems little point half-complying with the NMW leglisation. You may as well either comply or not comply.

Over the 10 years the NMW legislation has been in force that's £18,500 in additional NI (notwithstanding changes in NMW and tax rates nor compund interest) which I would rather have in my pocket than HMRC's.

[Lewis]

I don't quite follow the second bit of logic re the £1,125 adjustment but generally agree with the principle. It is not a huge amount of money because at £9.5K there is only £4K over the NI threshold.

However, there are a lot of people out there paying £15K or more in salary and they are the ones who would really benefit (to the tune of about £1,850 pa I reckon based on £15K gross salary).

£15K pa equates to 2,717 working hours. I would guess that most contractors work those sorts of hours in total once you take account of holiday pay, travel to and from your client and a bit of accounting/research etc in the evenings and weekends.

Whereas £9,500 equates to about 33 hours a week. There seems little point half-complying with the NMW leglisation. You may as well either comply or not comply.

Over the 10 years the NMW legislation has been in force that's £18,500 in additional NI (notwithstanding changes in NMW and tax rates nor compund interest) which I would rather have in my pocket than HMRC's.

I meant it would be great if I could get out the extra £4.5K of company money losing only 21% corporation tax but for me in reality it's unlikely I could. So I just took my typical 75% take home as assumed that I could get that out of the £4.5K instead. But it's not that significant anyway, so ignore my rambles.

If you say you work a 37 hour week, 45 weeks of the year then that is 1665 hours. At the NWM of £5.73 that comes to £9,540.

[KentPhilip]

Just had a thought: If you choose to pay yourself a higher salary, such as £30K, then this might perhaps deter HMRC from launching an IR35 investigation. This is because they will think that if they find you pass IR35 then you might change to paying a minimal salary, and they'll lose alot of Employers NI subsequently.

Or maybe they are not that forward-thinking.

Thoughts?

[THEPUMA]

I meant it would be great if I could get out the extra £4.5K of company money losing only 21% corporation tax but for me in reality it's unlikely I could. So I just took my typical 75% take home as assumed that I could get that out of the £4.5K instead. But it's not that significant anyway, so ignore my rambles.

If you say you work a 37 hour week, 45 weeks of the year then that is 1665 hours. At the NWM of £5.73 that comes to £9,540.

You may spend 37 hours pw on site but presumably you are claiming home to work travel on the basis that you work from home in which case it follows that such travel time must be counted.

In addition, I'm sure most contractors must spend a reasonable amount of time raising invoices, preparing expense claims, doing dividend minutes, dealing with the bank and lawyers etc, all of which constitutes your employment duties.

Also, as a worker you are entitled to holiday pay at your normal rate so of your 7 weeks holiday above, 4.8 weeks would have to be paid.

[Lewis]

You may spend 37 hours pw on site but presumably you are claiming home to work travel on the basis that you work from home in which case it follows that such travel time must be counted.

In addition, I'm sure most contractors must spend a reasonable amount of time raising invoices, preparing expense claims, doing dividend minutes, dealing with the bank and lawyers etc, all of which constitutes your employment duties.

Also, as a worker you are entitled to holiday pay at your normal rate so of your 7 weeks holiday above, 4.8 weeks would have to be paid.

I don't know enough about it, I just thought it didn't seem way off, but I am happy to stand corrected. I thought NMW didn't apply to directors so I googled and found this, which is quite interesting: http://www.taxwriter.co.uk/writing/pdfs/NMW.pdf

The national minimum wage does not apply to company directors unless they have contracts which make them ‘workers’. Company directors are classed as ‘office holders’ in common law and can do work and be paid for it in that capacity. This is true no matter what sort of work is done or how it is rewarded. So, it is unlikely that a director will have an implied contract which makes him a worker. However, company directors who have employment contracts will need to be paid the national minimum wage. If a company director is unsure whether he has entered into an employment contract with his company he may wish to take legal advice.

I guess accountants that recommend NMW are concerned that contractors could potentially be classed as "workers" by HMRC.

[Lewis]

Just had a thought: If you choose to pay yourself a higher salary, such as £30K, then this might perhaps deter HMRC from launching an IR35 investigation. This is because they will think that if they find you pass IR35 then you might change to paying a minimal salary, and they'll lose alot of Employers NI subsequently.

Or maybe they are not that forward-thinking.

Thoughts?

They have less to gain from going after you so I can certainly see that you are at less risk of an investigation.

[THEPUMA]

I don't know enough about it, I just thought it didn't seem way off, but I am happy to stand corrected. I thought NMW didn't apply to directors so I googled and found this, which is quite interesting: http://www.taxwriter.co.uk/writing/pdfs/NMW.pdf



I guess accountants that recommend NMW are concerned that contractors could potentially be classed as "workers" by HMRC.

Yes basically my point was that it seems inconsistent to comply with NMW but not holiday pay which are both targetted at the same classes of worker. I am not on holiday pay though.

[LA1]

Funnily enough, I do!

I wrote it; it is quite noddy and I cobbled it together from the permie contracts I still have going back 2 decades. I did it specifically so I could state:

"It is company policy that no employee will exceed the hours specified in the European Working Hours Directive. No employee will be asked to opt out of any such agreement."

I did that so when an agent asked me to, I could say "Sorry, can't".

You realise that by OPTING IN you automatically give yourself employee status for every contract ie you will fall INSIDE IR35 regardless of the contract wording. If you want employment rights then you are an EMPLOYEE. Dividends are therefore illegal and if you are investigated you will be fined and have to pay all tax and NI on your dividends. Surely your accountant advised you of this??