Mitigate Higher Rate Tax Liability

[tbrain]

Hi,

I'm relatively new to the contracting world - around 5 months in...

I've just been extended for a further 6 months which means that I will have been in work continually for circa 13 months. I sat down the other day & did some calculations around higher tax liability & figured that I'd better start giving some thought to how I could mitigate the liability!

So, options include:

i) ISAs
ii) Pensions
iii) Second shareholder

Am interested in knowing how other people mitigate the risk, & specifically whether you have limited companies with second shareholders that aren't your married partner...

Cheers.

[TykeMerc]

I don't see it as a risk, in my case I only take salary and dividends up to the higher rate threshold. The extra remains in the business for quiet times or when I want time off.

I'm reluctant to use pensions at the moment although they are arguably tax efficient.

[northernladuk]

You may or may not have heard of the term 'Warchest'? If you hang around here long enough you will see many new contractors fall foul of this. They often get used to the money they earn and spend it all forgetting that a few months of the year on the bench is a distinct possibility and do not factor this in, particularly at the beginning. You need to have 3-6 months at least saved in your bank that you have not drawn on incase of bench time. Once you have this THEN you can start thinking about spending it all on dirty cars and fast women.

You obviously do not have to draw the maximum dividend so as Tyke says just do not draw over the tax threshold. Your accountant should give you the numbers you need to meet.

[tbrain]

Probably being a bit of a dufus, but using a scenario of being in employment for 10 out of 12 months per annum at with an average salary & gross dividend payment of £9000 per month (excluding VAT), it would take approx. 5 months to reach the HRT bracket.

So, after having worked for 10 months I would have circa £45000 sitting in my bank account.

This is fine, but how do I then extract those funds from the bank account in a tax efficient manner assuming that I have no significant periods on the bench? Or indeed, if I do have a lengthy period on the bench how do I then extract those funds to pay the mortgage etc!

[Ignis Fatuus]

Probably being a bit of a dufus, but using a scenario of being in employment for 10 out of 12 months per annum at with an average salary & gross dividend payment of £9000 per month (excluding VAT), it would take approx. 5 months to reach the HRT bracket.

So, after having worked for 10 months I would have circa £45000 sitting in my bank account.

This is fine, but how do I then extract those funds from the bank account in a tax efficient manner assuming that I have no significant periods on the bench? Or indeed, if I do have a lengthy period on the bench how do I then extract those funds to pay the mortgage etc!

1. how do I then extract those funds from the bank account in a tax efficient manner assuming that I have no significant periods on the bench?
You don't, if you're not on the bench. You keep the funds for when you are on the bench.

2. if I do have a lengthy period on the bench how do I then extract those funds to pay the mortgage etc?
Then you keep extracting salary at the same rate as when in contract.

NB when you say "being in employment for 10 out of 12 months per annum" do you mean "being in contract etc"? You are always employed, by your Ltd Co. You are never employed by the client.

[TykeMerc]

If you've got a reasonably sizable warchest in the company accounts and are on the bench or the beach, then there's absolutely nothing to stop you drawing a salary and dividends from that pile of cash in the business (assuming you've paid other liabilities so it's actually profit).

You can just sit on the cash until you decide to close the business and make a final disbursement which I believe can be done quite efficiently, or just "retire" early and carry on paying yourself out of the cash mountain while you do the holiday type stuff, bung it into pension schemes or whatever is the best advice at the time.

NB when you say "being in employment for 10 out of 12 months per annum" do you mean "being in contract etc"? You are always employed, by your Ltd Co. You are never employed by the client.

Well put!

[northernladuk]

Probably being a bit of a dufus, but using a scenario of being in employment for 10 out of 12 months per annum at with an average salary & gross dividend payment of £9000 per month (excluding VAT), it would take approx. 5 months to reach the HRT bracket.

So, after having worked for 10 months I would have circa £45000 sitting in my bank account.

This is fine, but how do I then extract those funds from the bank account in a tax efficient manner assuming that I have no significant periods on the bench? Or indeed, if I do have a lengthy period on the bench how do I then extract those funds to pay the mortgage etc!

I don't know what your rates are and what you do dividends of £9k a month??? Dividends are distributed out of profits. I just want to play devils advocate and ask if you are really making £9k a month PROFIT. Way to go you if you are!!!

[tbrain]

If you've got a reasonably sizable warchest in the company accounts and are on the bench or the beach, then there's absolutely nothing to stop you drawing a salary and dividends from that pile of cash in the business (assuming you've paid other liabilities so it's actually profit).

You can just sit on the cash until you decide to close the business and make a final disbursement which I believe can be done quite efficiently, or just "retire" early and carry on paying yourself out of the cash mountain while you do the holiday type stuff, bung it into pension schemes or whatever is the best advice at the time.



Well put!

Makes sense now. Ta for the input guys!

[northernladuk]

Makes sense now. Ta for the input guys!

Do you have an accountant? Just a bit worried about the 9k divi's comment.

[Wanderer]

Am interested in knowing how other people mitigate the risk, & specifically whether you have limited companies with second shareholders that aren't your married partner...

Not sure how S660a applies to shareholders who are not married or family. Can anyone comment on this? I think it's OK to make them shareholders but of course the money will be theirs not yours and they could easily demand their share of the profits off you if they wanted to...

Dividends over the higher rate tax? A nice problem to have. I'd say don't draw any income that puts you into the higher rate tax if you can avoid it. Just leave it in the company for a rainy day or take it out with an ESC-C16 in a few years time.