Plan B: Payment Options

[minstrel]

I've got a Plan B that has reached the stage where we need someone working on it full time.

There are three people involved: contractor 1, permie 2 and permie 3.

The intention is that permie 3 will give up his job so that he can be 100% dedicated to the plan B, and contractor 1 and permie 2 will pay permie 3 until plan B starts generating enough income to support permie 3 and provide a profit for the others.

What is the most tax efficient way of paying permie 3?

The worst possible way I can think of doing it would be for contractor 1 to pay additional dividends via ltd (taking him into higher rate tax) and then contractor 1 and permie 2 paying permie 3 with post tax income. Permie 3 would then declare the income he receives and pay tax again on the money.

Another way would be for contractor 1 to take on permie 3 through his limited company, pay him minimum salary and dividends (using different class of share). Not sure how permie 2 would inject his cash in though.

At some point we'll probably need to start a limited company for plan B. Would it be best to start that now and for contractor 1 (or his ltd) and permie 2 to buy share capital or loan the company money so that it could pay permie 3 in salary and/or dividends?

I did hope that we might be able to do something with EIS, but I don't think the tax breaks work because we're all connected parties to the company.

Naturally, I'll be asking an accountant for advice, but it would be good to get some ideas from you guys too. I'm sure it's a fairly common situation for start-ups.

[Grinder]

Take permie on the payroll, pay him sub PAYE limits + childcare, shopping and luncheon vouchers.

Why would you consider paying someone out of dividends

The most obvious option as far as I can see if for permie to get his own Limited & be a contractor as long as you can be sure around IR35.

[minstrel]

Why would you consider paying someone out of dividends

If we pay in dividends the tax liability is just Corporation Tax (21%).

If we pay him salary there is income tax plus employees and employers National Insurance which is going to be much more than 21%.

The most obvious option as far as I can see if for permie to get his own Limited & be a contractor as long as you can be sure around IR35.

But who would pay his limited company? Contractor 1 Ltd company surely couldn't directly pay it because the work is not related to Contractor 1 business - Plan B is a separate venture. If Contractor 1 pays permie 3 limited company out of post-tax dividend income, that looks pretty tax heavy (taxed once through Contract 1 ltd and then again through permie 3 limited).

[tim123]

But who would pay his limited company? Contractor 1 Ltd company surely couldn't directly pay it because the work is not related to Contractor 1 business - Plan B is a separate venture. If Contractor 1 pays permie 3 limited company out of post-tax dividend income, that looks pretty tax heavy (taxed once through Contract 1 ltd and then again through permie 3 limited).

Surely you are expecting Plan B to have an income?

The normal way to do this is to set up the company, loan it some money which you use to pay the necessary salaries and then pay back the loan when the income comes in.

Of course, you are stuffed if that income never materialises. What is the likelihood of that? If it's too high you shouldn't even be starting the venture

tim

[thunderlizard]

At some point we'll probably need to start a limited company for plan B. Would it be best to start that now and for contractor 1 (or his ltd) and permie 2 to buy share capital or loan the company money so that it could pay permie 3 in salary and/or dividends?

That seems the sensible option. If plan B is a separate venture from contractor 1's normal business, it should be done under a separate entity - tax aside, just from a direction point of view. Split the initial shareholding in proportion to the amounts of money put in by the 2 investors (one of whom could be the contractor's company), and use it to pay permie 3 a wage.

[pmeswani]

If we pay in dividends the tax liability is just Corporation Tax (21%).

If we pay him salary there is income tax plus employees and employers National Insurance which is going to be much more than 21%.


But who would pay his limited company? Contractor 1 Ltd company surely couldn't directly pay it because the work is not related to Contractor 1 business - Plan B is a separate venture. If Contractor 1 pays permie 3 limited company out of post-tax dividend income, that looks pretty tax heavy (taxed once through Contract 1 ltd and then again through permie 3 limited).

Tell the permie guys to become contractors and tell them to invoice you for work done on an agreed rate. That way, you don't pay any NI or IT or their earnings... not sure if this would benefit CT.

[dave20]

You could also make a partnership, they're not as complicated as a limited company.

[MPwannadecentincome]

I think it all depends on how you want to take or share the risks and rewards.

One approach is you pay the 'staff' or 'subcontractors' a market rate, then take all the risk and reward yourself. To do this just put them as costs through your current ltd company - this will of course reduce your profits and therefore how much money you can draw out.

Another approach is to share the risk and reward so setting up a partnership or another ltd co would allow you to do this and you should pay slightly less to the 'staff'.

Good luck!

[minstrel]

Thanks for all the replies guys - some great ideas.

I'll do a bit more research and speak to my accountant and then let you know how we decide to do it in the end.