In a fulltime job AND contracting at the same time - tax effiency

[NotAllThere]

...By not paying yourself a wage and only divis it looks like you are blatently trying to get out of paying the tax you are due...

No it doesn't. It's the normal way of contractor ltdco working.

...common sense dictates this isn't going to work......

Yes it will. It's the normal way of contractor ltdco working. The only reason to pay yourself a minimum salary is to get the minimum NI contributions.

To the OP. Switch to the dividend structure as recommended. Don't pay yourself a salary. Build up the funds in the company, and then you can either use it as a warchest, or at some point, close the company down, take the money out, and pay Capital Gains on it.

[psychocandy]

IANAA but feel like I can have a go at this one...

By not paying yourself a wage and only divis it looks like you are blatently trying to get out of paying the tax you are due, which is exactly what you are trying to do. I don't know the exact rules but common sense dictates this isn't going to work...

Nah. No problem at all not paying yourself a salary if you dont want to. After all, you can run a company and not be obliged to take any money out if you dont want to.

My situation is slightly different (started year on permie salary/redundancy payment) so I'm not paying myself any salary for this year from contract income. Accountant says this is absolutely fine.

After all, only reason we all pay salary is to save on tax etc/ get NI paid anyway isnt it?

[psychocandy]

Hi there,

I have a limited company from my contracting days. I started working again full time about 6 months ago as an employee, but have recently additionally started doing some contracts on the side again through my company (we have a baby and those nursery fees are expensive!). I don't charge day rates anymore, but project rates, as I do the work in my spare time.

I am a higher rate taxpayer through my full time job salary (£48k), so any additional salary I draw from my limited company is taxed at 40%.

My wife helps me with the limited company and has 49% split of the shares - I have the remaining 51% and am the sole director. She is also a lower rate taxpayer, so her effective tax rate on dividends at the moment is 0%, while mine is 32.5%.

My accountant has recommended paying me the minimum salary through the company - and take the rest in dividends, like I used to do when contracting - but I would rather not take any salary, as I already have a salary from the other full time job, and would have to pay 40% income tax on this additional salary.

Additionally - is it possible for me to withhold my dividends and keep them in the company, but for my wife to take out dividends at the same time? As my tax rate for both salary and dividends is rather high, I would rather keep my share in the company or use it on hardware expenses etc, but still let my wife draw a dividend.

Any other tips for running this tax efficiently, yet obviously legally?

Many thanks!

But of course, if you're permie salary is already taking you up to 40% bracket, then any divs will still be at 40% effectively anyway. All you're saving by not paying salary is the NI.

[psychocandy]

In your case I see paying yourself a salary through the business as a 'forced' way of putting your earnings into the higher rate tax bracket. If you are not too sure if you will be taking earnings from the business or not, then leave the salary at £0, and take dividends as and when. As a higher rate taxpayer, your overall tax position will be the same either way (assuming your salary were to stay below the NI threshold), but with dividends at least you have the flexibility of whether you want to take them or not.

With regards to paying a dividend to your wife, for flexibility ensure you have set-up different classes of shares. There are a few rules to abide by to ensure you don't get caught up in the Settlements legislation, so check with your accountant that you are OK with that.

I thought they had to be the same class of share. As per the Arctic ruling.

Also, AFAIK, the current settlements legislation wont apply due to the Arctic ruling....

[Greg@CapitalCity]

I thought they had to be the same class of share. As per the Arctic ruling.

The class of share is irrelevant. Its the gifting of the shares that is important, and if that gift of shares is not outright or the gift is only a right to income and not a right to capital, the Settlement provisions may apply.

Also, AFAIK, the current settlements legislation wont apply due to the Arctic ruling....

The Settlement provisions are alive and well! A few ways to get caught up in the Settlement provisions are;
(1) The shares that are gifted have different rights (eg voting rights, rights to capital on winding up etc);
(2) Use of dividend waivers;
(3) If the HMRC deem the gift of not outright due to dividends to two shareholders being paid into the same joint bank account;

[psychocandy]

The class of share is irrelevant. Its the gifting of the shares that is important, and if that gift of shares is not outright or the gift is only a right to income and not a right to capital, the Settlement provisions may apply.


The Settlement provisions are alive and well! A few ways to get caught up in the Settlement provisions are;
(1) The shares that are gifted have different rights (eg voting rights, rights to capital on winding up etc);
(2) Use of dividend waivers;
(3) If the HMRC deem the gift of not outright due to dividends to two shareholders being paid into the same joint bank account;

Yes. Agreed with (1) and (2)

Interesting you should mention (3). My accountant told me there is no issue paying dividends into same joint account as long as it is two separate payments.

In my case, the other shareholder is my Mrs. My understanding is that this makes it OK to gift shares in any case?

I did open a separate current account for the Mrs though. Maybe I should start paying into this instead?

[Greg@CapitalCity]

I did open a separate current account for the Mrs though. Maybe I should start paying into this instead?

Yes, you definitely should. If you are deemed to derive a benefit from the dividends paid to your wife, the gift of the share was not outright and the Settlements provisions would apply. How can you show your wife's dividends paid into a joint bank account do not benefit you? Avoid this question in the first instance by paying your wife's dividends into her own personal bank account.

[THEPUMA]

Yes, you definitely should. If you are deemed to derive a benefit from the dividends paid to your wife, the gift of the share was not outright and the Settlements provisions would apply. How can you show your wife's dividends paid into a joint bank account do not benefit you? Avoid this question in the first instance by paying your wife's dividends into her own personal bank account.

Greg

I think you are confusing the legislation in s660(A) (in old money) with the spousal exemption in s660(A)(6).

S660(A) can apply where the donor retains an interest in the property settled. However, there is an automatic assumption in s660(A) that spouses derive a benefit from income paid to each other so that is irrelevant in this case.

The exemption in s660(A)(6) relies on there having been an outright gift of the property (ie the shares) but I think this is a different issue than whether or not any benefit is derived.

When the Arctic Systems case went to the House of Lords, the Lords unanimously agreed that the outright gift was made when Mrs Jones was allowed to subscribe for a share at undervalue. They spent no time at all contemplating whether or not Mr Jones had benefited from the dividends received by his wife, which they surely would have done, had they considered this relevant, even if the dividends were paid into single accounts.

PUMA

[psychocandy]

Yes, you definitely should. If you are deemed to derive a benefit from the dividends paid to your wife, the gift of the share was not outright and the Settlements provisions would apply. How can you show your wife's dividends paid into a joint bank account do not benefit you? Avoid this question in the first instance by paying your wife's dividends into her own personal bank account.

Gift of share not outright? What does this mean?

Like I said, I did consider paying wifes dividends into separate account (and then transferring anyway) but accountant said no need. Interesting to see a different viewpoint here.

[psychocandy]

Greg

I think you are confusing the legislation in s660(A) (in old money) with the spousal exemption in s660(A)(6).

S660(A) can apply where the donor retains an interest in the property settled. However, there is an automatic assumption in s660(A) that spouses derive a benefit from income paid to each other so that is irrelevant in this case.

The exemption in s660(A)(6) relies on there having been an outright gift of the property (ie the shares) but I think this is a different issue than whether or not any benefit is derived.

When the Arctic Systems case went to the House of Lords, the Lords unanimously agreed that the outright gift was made when Mrs Jones was allowed to subscribe for a share at undervalue. They spent no time at all contemplating whether or not Mr Jones had benefited from the dividends received by his wife, which they surely would have done, had they considered this relevant, even if the dividends were paid into single accounts.

PUMA

Not that I totally understand things but I too was under the impression that Arctic meant that you were pretty much ok if shares were gifted to your spouse and the share class was the same.