Switching to a Ltd company after crossing the higher-tax threshold

**Maslins** · 20 October 2009, 09:04

Originally posted by ah45 View Post

Hi All,
I tried a few searches before I posted this, so i hope im not going over old ground.

I have a very simple problem/question. I am currently with Parasol, the umbrella group. I have already been paid over the ~£40,000 higher tax rate threshold.

Therefore in starting a Ltd company, I am trying to do the maths to work out if it is worth switching mid financial year.

Assuming this: Im a higher tax payer (at least i think I am as in fact Parasol pay most of my wages in commission not *basic rate*, but I assume there are no rules around this meaning only my basic rate contributions count towards my earnings allowances). And assuming any dividends would pay myself would attract ~25% tax, and any profit attract corperation tax at ~20%, im concerned that I will actually be worse off this year (until April).
As say I invoiced (round number): £9,000 a month, pay myself minium wage of ~£500 a month, id lose about half of that in income tax, NI and employers NI ~£250. On the profit - £8,500, id pay, firstly, 21% C-tax, leaving £6715, then pay the rest to myself in dividends and thus paying 25% tax, leaving £5036.25.

Have i missed anything out? (i know i can add expenses to reduce my tax burden)

Has anyone else had a similar experience, what did you do, what would your advice be?

Through the umbrella, your situation will broadly be:
Gross pay £100,000 (arbitrary figure)
Less 12.8% employers NI on most of it
Less 11% employees NI on ~£35k of it
Less 1% employees NI on ~£60k of it
Less 20% tax on ~£35k of it
Less 40% tax on ~£60k of it

If you go Ltd now, and paid yourself £500/month, that wouldn't be subject to any NI as NI contributions are per employment...that employment would be below the threshhold (prior earnings from Parasol are irrelevant for this).

Bear in mind you don't have to draw out all profits as dividends. It can be advantageous to leave them in there, so either you can draw down in future when you may have lower income (if in basic rate band there is no additional tax to pay), or possibly you could wind up the company further down the line and get the funds out as a capital gain.

Also, carefully consider your position with regards to IR35. If your contract is within IR35 you will effectively be taxed in the same way as you currently are under the umbrella, only with a 5% notional expenses deduction.

**ah45** · 20 October 2009, 10:07

Thanks very much for your reply.

I suppose it makes sense, even with the additional burden of 25% tax on dividends, I would be better off in terms of take home pay due to the lack of any NI contributions.

Another option I was toying with would be making larger contributions to a pension fund.

Thanks very much.

**VectraMan** · 20 October 2009, 12:51

Originally posted by Maslins View Post

If you go Ltd now, and paid yourself £500/month, that wouldn't be subject to any NI as NI contributions are per employment...that employment would be below the threshhold (prior earnings from Parasol are irrelevant for this).

You'll still pay income tax on that £500/month, and as you've passed the threshold it'll be at 40%.

The best approach might be to not pay yourself anything for the remainder of this tax year, and then you can plan it properly starting in April.

**Maslins** · 20 October 2009, 14:36

Originally posted by VectraMan View Post

You'll still pay income tax on that £500/month, and as you've passed the threshold it'll be at 40%.

True, but the salary still works out marginally more efficient due to lack of NI contributions.

£500 salary less 40% tax = £300
Total tax = £200.

otherwise £500 less 21% CT = £395 less 25% dividend = £296
Total tax = £204.

Switching to a Ltd company after crossing the higher-tax threshold