Struggling to understand tax efficiency...

[Waldorf]

Using the calculator below, based on a turnover of £100K then you would retain 72% of your income, this is after taking account of accountancy fees and paying a lowish salary of £7488.

Try the calculator yourself, you can try different scenarios.

https://www.nixonwilliams.com/net_pay_calculator.asp

[Contreras]

So far I haven't taken any money out of the company at all, and I probably won't -

Don't forget that mileage claims (45p/mile), use of home (£4/week), and reimursement of business expenses can all be paid without incurring a tax liability regardless of other income.

[insomniac]

Yep, although it does the accountants out of business, that's what I would recommend in these circumstances. Don't set up your own company unless its a long term venture - although I get the impression that she has already sailed

Yep, that's right. Alas, that ship has already sailed. It's my first time contracting and was advised by several friends that the limited company route was the way to go.

However, now that I'm considering the various tax ramifications/costs/hassle of closing the company down, I understand that it really should be a long-term venture, as you say.

Thanks again.

[insomniac]

Yes, you are on the right track. Hold the cash in the company for now. From April 6th you can draw £7488/year salary and ~£32k dividends from your profits (after 20% corp tax is paid).

Alternatively, you could put the money into a pension, use it to start up a business or close the company down and take it as a capital distribution at a much lower tax rate.

Thanks for that. I think the problem I'll have is that if I do go back to a permanent contract, then I'll fall short of the one year qualifying period for claiming Enterpreneur's Relief.

However, I do intend to use some funds towards a pension.

[malvolio]

Yep, that's right. Alas, that ship has already sailed. It's my first time contracting and was advised by several friends that the limited company route was the way to go.

However, now that I'm considering the various tax ramifications/costs/hassle of closing the company down, I understand that it really should be a long-term venture, as you say.

Thanks again.

That's the whole point and the one missed by 99% of non-contractors and every taxman in Britain: we use Limited Companies because it's the best way to run the business and smooth the earnings from a variable income stream, it's nothing to do with saving tax (although anyone who thinks getting £4 a week tax free is a worth the effort is probably missing the point as well... ).

Bascially, you're not in business, you don't need a Limited Company.

[Wanderer]

we use Limited Companies because it's the best way to run the business and smooth the earnings from a variable income stream, it's nothing to do with saving tax

Yeah and the fact that using a LTD company (outside IR35, £100k income, £7,488 salary, 50/50 share split with non working spouse) gives you 40% (£23k) more net income than using an umbrella company is completely incidental...

[malvolio]

Yeah and the fact that using a LTD company (outside IR35, £100k income, £7,488 salary, 50/50 share split with non working spouse) gives you 40% (£23k) more net income than using an umbrella company is completely incidental...

Yes, that is incidental, and recognises the risks you are carrying by not being an employee. All we're doing is using the law to optimise our company profits, and following the long-established principle that you have every right to pay the tax that is legally due and no more. If Hector (or more accurately, the Chancellor) wants to change that, he has to change the law: until they do I'll use them as written thanks, with a clear conscience.

Seriously, it's your attitude that does the damage, not mine. And just to blow a hole in your argument, I could earn more as an employee than I do as a contractor, even at my healthy day rate, with a lot less risk, as could many of my peers.

[northernladuk]

Both Mal and Wanderer are right, just depends on where you look at it from. Mal from a business perspective, you run a LTD because that is what a business does. Wanderer just looking at the cash output against another tax vehicle.

Both are right, just depends where you are looking at it from and possibly your reason for using it. Tax advantage or bone fide business.

What it isn't is something for permies to jump in and use whenever they fancy a bit of work in between perm jobs.