Caught by IR35 - How Do I Pay Myself?

**Wanderer** · 26 September 2010, 17:24

Originally posted by Tomsk View Post

Feel free to say I should talk to my accountant about this - but I like to understand the rules and he isn't an explainer.

You should talk to your accountant about this

, but so you understand the system here's roughly what you have to do:

IR35 caught means that you can't pay dividends for company income on this contract. You have to pay out all the money as a salary. You will then pay Employers NI, Employees NI and PAYE on the income. There are calculators on the net, google IR35 calculator and you can get an idea of how much you will receive out of your gross.

You can claim 5% of the contract value as expenses under the 5% rule. Note that you don't have to justify (or even spend) the 5% on expenses - it's a concession.

You can claim other things, primarily accountancy, computer equipment, travel and subsistence (meals) for up to 2 years, read about and understand the 2 Year Rule if you know you will work at the same location for 2 years.

Consider signing up for the VAT Flat Rate Scheme if you aren't going to be buying and selling equipment.

Good luck!

**Tomsk** · 26 September 2010, 17:59

Many thanks, Wanderer. I know about the 5% rule and the 2 year rule (I live 5 mins from the site so no great shakes). I'm already on the VAT flat rate scheme. I've seen the IR35 calculators - always seem to come at it from the angle of avoidance.

I'm sure you know better than me but are you oversimplifying...? I thought that you could pay dividends, however, when the end of the year comes the deemed salary calculation means that they actually get treated as salary. If I'm right then can I do as I suggested and just pay dividends and get the accountant to square it all at the end of the year?

If I'm wrong - so unlikely ;-) - then do I have to do PAYE or can it be payed retrospectively at the end of the year?

**centurian** · 26 September 2010, 18:21

Originally posted by Tomsk View Post

I thought that you could pay dividends, however, when the end of the year comes the deemed salary calculation means that they actually get treated as salary.

You're right - IR35 doesn't ban you from taking dividends - it just adds an additional charge (the deemed payment) which works out the same as if you had paid 95% PAYE.

There was a justification for making PAYE payments throughout the year, which is why so many do it that way, but I'm struggling to find the evidence for it - I think it had something to do with HMRC being able to charge interest for each monthly PAYE payment as well.

**Moscow Mule** · 26 September 2010, 18:47

Dividends are paid out of profit.

If you're IR35 caught, there shouldn't be any profit left in the company.

**Wanderer** · 26 September 2010, 20:44

Originally posted by Tomsk View Post

I'm sure you know better than me but are you oversimplifying...? I thought that you could pay dividends, however, when the end of the year comes the deemed salary calculation means that they actually get treated as salary. If I'm right then can I do as I suggested and just pay dividends and get the accountant to square it all at the end of the year?

No, not an over simplification, that's pretty much how it works. There is a lot of boring admin stuff calculating your PAYE/VAT and getting it paid on time which your accountant will sort out for you.

As with Moscow Mule, dividends are paid out of profits and the IR35 caught company makes no profit so I would have thought that you should put dividends out of your mind. Even if you did take dividends, you have to keep the tax money in your company account so there is no benefit to you personally and you aren't going to get much interest.

Other than that, it sounds like you've got it pretty straight so go ahead and speak to your accountant who will sort out the finer points for you.

**Tomsk** · 28 September 2010, 18:51

Thanks for all the advice.

Tom

**ASB** · 29 September 2010, 09:35

Originally posted by Wanderer View Post

No, not an over simplification, that's pretty much how it works. There is a lot of boring admin stuff calculating your PAYE/VAT and getting it paid on time which your accountant will sort out for you.

As with Moscow Mule, dividends are paid out of profits and the IR35 caught company makes no profit so I would have thought that you should put dividends out of your mind. Even if you did take dividends, you have to keep the tax money in your company account so there is no benefit to you personally and you aren't going to get much interest.

Other than that, it sounds like you've got it pretty straight so go ahead and speak to your accountant who will sort out the finer points for you.

[pedant]A company which has IR35 caught contracts makes profits in exactly the same way any other company does, i.e. an excess of income of chargeable expenses. When a contract is IR35 caught the only mandatory expense is the paye on the deemed payment (i.e. NOT the deemed payment itself). Thus a company could still make profits - chargeable to CT etc and pay dividends. However I cannot think of any reason on earth why a "1 man outfit" would want to do this. It does complicate things somewhat and is liable to lead to double taxation.[/pedant]

**VectraMan** · 29 September 2010, 13:43

My understanding was that there was no need to pay "dividends", i.e. no need to work it out based on 79% of the profit, fill out the minutes form etc. Rather whatever is left in the company account after VAT and PAYE or anything else is your money and you can help yourself to it. You then have to personally pay a big tax bill down the road.

If you were particularly short of cash you could almost be better off in the short term acting as if inside IR35, because the tax bill wouldn't come for a while. But obviously worse off in the long run.

Caught by IR35 - How Do I Pay Myself?