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

[jessej]

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!

[northernladuk]

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...

If you have the same types of share you can defer (is that the term) your payment but this is going to light you up like a roman candle to HMRC. The only reason you would really do this is to get out of paying the tax you are due.. Oh, again you are. If you have the same shares you have to pay it out (or take an option that attracts HMRC). If she had a different share type you could pay her what you wanted regardless of what you pay yourself but in that case you would be the main earner but your wife getting the main money.. Guess what that looks like to HMRC.. thats right, avoid tax...which is etc etc...

I don't know exactly what your options are but bearing in mind all you are trying to do is avoid paying what you should I can't see it working very well.... There is of course the option of paying what you are due but nothing with checking if you can tweak it somehow..

How did I do?

[Greg@CapitalCity]

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.

[centurian]

If you already have a "day job", then IR35 is unlikely to be an issue - you should be able to argue that this is true self employed work.

That said, it's not an absolute defence - many "normal" people hold down two jobs through PAYE. Paying yourself mininum PAYE salary will not attract any NICs - and the tax will be broadly the same - and that amount will certainly be IR35-proof.

[Wanderer]

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...

I don't think you will do very well by trying to apply common sense when dealing with our tax system.

jessej, you have a couple of options:

1. Retain the money in your LTD and use it as capital to set up a business one day
2. Pay the dividends to your wife and not yourself. Sounds a bit odd but it's within the rules.
3. Take the money for yourself and pay the tax.
4. Pay the money into a pension

I would say DON'T pay yourself any more salary, you will just get clobbered for tax and complicate your permie tax affairs.

Oh, and give your accountant a kick up the arse, they should have told you all this rather than parroting the "low salary and dividend" line that the average contractor with no other income would take.

[prozak]

Keep the money in the company build up a warchest for later use on a rainy day.

[Zoiderman]

Start up a holding company and use the money elsewise, or start up a company in Jersey and do your work from there...

[jessej]

Thank you very much for the knowledgeable answers!

Sounds like the best option for us at the moment would be for me to withhold my salary and dividends and keep them in the company - to build up a war chest to go into business properly later. And for my wife to keep drawing dividends to compensate for her help and 49% shareholding status.

Do we need to change the share types for her to be able to take a dividend while I hold mine back? How much can she take out in dividends? AFAIK at the moment we have the same share types.

[TimCaprica]

Thank you very much for the knowledgeable answers!

Sounds like the best option for us at the moment would be for me to withhold my salary and dividends and keep them in the company - to build up a war chest to go into business properly later. And for my wife to keep drawing dividends to compensate for her help and 49% shareholding status.

Do we need to change the share types for her to be able to take a dividend while I hold mine back? How much can she take out in dividends? AFAIK at the moment we have the same share types.

When you pay a dividend, in theory it should go to both of you. So you need to waive your portion of it. You just need to formally write this down each time which is explained here:

When you do it you should also have a set of accounts made up to the date of declaring the dividend saying you have enough profits to pay the dividend out of, prepare a dividend voucher and prepare some board minutes. Google will find all of these things for you quickly.

It's a bit concerning that your accountant advised paying a minimum salary.....

[Greg@CapitalCity]

So you need to waive your portion of it.

Whoa - careful with that one. Dividend waivers are a bad pointer to the Settlements provisions - avoid waivers. If you want to pay dividends to your wife, and not yourself, your best option is to create two classes of shares (each carrying the same rights). You can then pay dividends to the shareholder holding say Ordinary A shares, without also needing to pay dividends to the holder of the Ordinary B class of share.

Your wife can earn up to £42,475 in gross earnings and pay no additional personal tax on any dividends she receives. So to calculate how much in net dividends you can pay her, while keeping her below the threshold, the calculation is;
Total net dividends payable = (42,475 less her GROSS earnings from other sources) x 9/10 [the dividend tax credit adjustment]