Schedule E expenses when outside IR35

[tickerbrum]

I have a limited company, last tax year within IR35. This year I expect much of my work to be outside IR35. I have tried various web calculators to see the impact but am confused about Schedule E expenses (about £8,000/year). My brain says they are tax deductible in the company, against corporation tax, and are also tax deductible by me from my salary. Does this not mean that to be most tax efficient my salary should be amount of the personal allowance, 5035, plus expected allowable expenses, 8000, = 15,035? None of the online calculators seem to work like this. Am I missing something?

[boxman]

Hi

My understanding is that Schedule E expenses have nothing to do with IR35 so the calculation is the same whether you are in or out.

If you incur an allowable expense that is wholly, exclusively and necessarily (standard Revenue definition) in the course or your employment (or as an office holder if you are not an employee) then you should be fine. So the usual contractor claims for travel, accommodation and subsistence should not be a problem provided they are within the Revenue's rules.

In terms of getting the "right" level of salary for work outside of IR35 then you are correct in your assumption that the most NI-efficient salary will equate to the Lower Earnings Level (LEL) for NICs plus your Schedule E expenses. Allowable expenses are deducted prior to the calculation of Employer and/or Employee NICs. Personally I've opted for a 15k salary this year for this very reason.

Please double-check the above with your accountant as I'm not a tax expert though!

HTH

[VectraMan]

As I understand it, schedule E expenses are nothing to do with your salary or your tax. When I was with an umbrella, they deducted the expenses then treated the remaining money as your income and deducted the tax, then added the expenses back on and paid it in one payment. Effectively this meant I got 40% of the expenses refunded (because of the reduction in tax), and actually for mileage at 40p per mile I made a profit compared to the actual cost of petrol.

Now I have a Ltd, I just pay myself minimum wage as salary (minus income tax), then repay the expenses as two seperate things. Of course this comes out of your profits, so although you pay less corporation tax, there's also less to pay yourself as dividends, and as you aim to pay less tax with a Ltd. the end result is that you get less of the expenses refunded to you. A bit hard to get your head around.

Remember that expenses is effectively money you've leant to the company, so when the company repays you there's no net gain to worry the tax man (you still have to report it on your P11d though).

[tickerbrum]

Thanks both. It has clicked with VectraMan's comment "Remember that expenses is effectively money you've leant to the company, so when the company repays you there's no net gain to worry the tax man (you still have to report it on your P11d though)". I was thinking I had to increase my salary, forgetting that my company actually re-imburses me for my expenses.
Thanks again. Back to business rather than worrying about tax!