Principal Contractors / tax-efficiency / Isle of Man / Trustees

[tarbera]

85% is great

Genuinely not trolling.
I thought it could open up a conversation about "outlier" accounts set-ups.

Since I have returned to being mostly a contractor, I am getting targeted emails as I now am subscribed to contractor-specific environments.

Apologies if the thread has come across as troll-like.

15% to the chap running it, he just needs about 100 idiots to clear £200K a month, One year later he has £2.5million in the bank + 100% of everyones final invoices (another million) and he is off somewhere sunny for life.

Great idea, i see no downside for them what - so -ever

send me your payments Im doing a 50% scheme

[Clare@InTouch]

Genuinely not trolling.
I thought it could open up a conversation about "outlier" accounts set-ups.

Since I have returned to being mostly a contractor, I am getting targeted emails as I now am subscribed to contractor-specific environments.

Apologies if the thread has come across as troll-like.

The best option if you're working in the UK and you're UK resident etc is a limited company. Claim all the expenses you can, make sure you're outside IR35 and pay into a pension.

There are schemes available but they all carry a varying degree of risk, and many just don't work these days. Unless you have thousands of pounds to spend on individual specific tax advice you're not going to get a tailored appropriate alternative. If there even is one that could be better for you, which would depend on your own circumstances. What works for Google and Starbucks (and politicians) won't work for a normal person.

[ASB]

The best option if you're working in the UK and you're UK resident etc is a limited company. Claim all the expenses you can, make sure you're outside IR35 and pay into a pension.

I think there is also - sometimes - too much looking at a headline rate and being seduced by it. Depending on numbers and age there are some pretty good retention rates.

10k Salary. Tax free.
29k (ish) dividend. No further tax to pay.

This could work as follows. [Not strictly entirely accurate but close enough]



Turnover afters exes 45,848.13

EE's Salary 10,000.00
Gross Profit 35,848.13
CT: 7,169.63
Net Dividend: 28,678.50

Retained = 28,678.50 + 10,000 - 245 (ee ni) = 38433.50 = 83.82%



Ok, so that "only" equates to a rate of about 270 per day. Or somewhere well inside the top 10% incomes.

Of course, with a non working spouse or similar there is the potential to double up.

Equally over that the retention rate will start dropping. But everything above it will still be yielding 60%.

So, lets put on 540 a day. That's 71% retention. Not too shabby.

And that before any other forms of planning. Stuffing the rest in the pension (which is eventually worth about 6% due to the lump sum). Retaining and getting out the CGT from time to time. And entrepreneurs relief.

And of course "habitual" expenses like travel are often claimable, so you are still paying. But your travel costs a good chunk less than a permies. And it is a fair comparison; though there will be a lot of "but I'm an entrepreneur".

My retention rate as a reasonably well paid permie is a damn site worse.

So, make hay, be thankful. Use the rules that exist and are safe. And rejoice in the fact that your deductions overall are about 1/3rd of mine.

[ASB]

To illustrate the difference, let's assume your travel costs are £4,151,87.

Oh look a convenient gross costs of £50,000.

You end up with 38,433.50. After paying your travel of course.

Now Mr permie who costs his employer 50k will get a salary of 44,800 (roughly).

Yields 33,000 give or take. Knock off the 4,200 = 28,800.

So, the contractor - outside IR35 - is receiving approximately 33% more. Not exactly hard done to really is it?

Damn, I knew I shouldn't have looked ay my P60 earlier.

[Zero Liability]

As an aside, that does illustrate the gain by being a contractor outside IR35, but it also goes to show how over-taxed you are as a permie. I doubt most people would see an issue with retaining 80 - 83% of their income. But you're not likely to ever come near to that as a permie unless you're earning very little.

[northernladuk]

As an aside, that does illustrate the gain by being a contractor outside IR35, but it also goes to show how over-taxed you are as a permie. I doubt most people would see an issue with retaining 80 - 83% of their income. But you're not likely to ever come near to that as a permie unless you're earning very little.

I don't think that is a fair comparison. Surely the argument would be the permie as the stake in the ground and it would be how under taxed LTD contractors are.. which HMRC obviously agree with. Remember, permies use the rules, we use a loophole which HMRC are actively (and badly) trying to close.

[DonkeyRhubarb]

I don't think that is a fair comparison. Surely the argument would be the permie as the stake in the ground and it would be how under taxed LTD contractors are.. which HMRC obviously agree with. Remember, permies use the rules, we use a loophole which HMRC are actively (and badly) trying to close.

Contractors using a Ltd company are exploiting a loophole to underpay (avoid) tax?

Not many would publicly acknowledge that.

[eek]

Contractors using a Ltd company are exploiting a loophole to underpay (avoid) tax?

Not many would publicly acknowledge that.

Yep its one hell of an advantage. But I just thank the Callaghan Government for it....

[malvolio]

Contractors using a Ltd company are exploiting a loophole to underpay (avoid) tax?

Not many would publicly acknowledge that.

It's not a loophole. There are sound commercial reasons why I use a ltd Company, only one of which is that it is the most efficient way of operating when my principal route to work will not accept a Self Employed worker. I also source my own work, carry all the commercial risk that entails and fund a range of services that an employee would expect their employer to provide. I also generate a lot of tax income - around £40k a year all told on average - through CT, VAT and personal taxation, equivalent to an employee on a salary somewhat north of £100k.

Clearly, if I'm avoiding paying taxes, I'm not very good at it.

This classic urban myth that we are avoiding taxes is complete and utter bollocks. Using a Ltd Company is perfectly valid and reasonable, and they have a tax structure aligned to their commercial reality. No freelance contractor is avoiding anything (EBT users, Radio 1 DJs and used car traders excepted). And consider this; there are plenty of people in well paid,salaried jobs, who filter their peripheral income though a limited company; income which only derives from their main job (would you pay to hear Gordon Brown make a speech? Thought not...). They are the tax avoiders, not us, and really should be HMRC's main target.

[ASB]

I think it is a quirk rather than a loophole. When I started in the early 80s it made stuff all difference. There was a 15% surcharge on dividends. Employers ni was capped on the first x of salary. There was little point in accumulating profits. They were taxed as though they had been distributed anyway.

At the time there were reckoned to be no more than 8000. So as the regime improved under thatcher it wasnt an issue.

Personally I believe the way most contractors operate is more akin to slf employment. I would have been happy to be treated as such. Well I would have moaned a bit because the bills went up but ultimately I would concede it as reasonable.

Several other eu countries have artisan type structures which enable people to benefit from selling their own labours and gain some advantage from it over conventional employment. Perhaps if we started to move in this direction it would have been bettef than ir35 etc and would provided rather more clarity.

I have never thought it right that I was able to structure my affairs to such fiscal advantage. It was probably close to 7 figures over that time. I never felt any guilt either. They weren't my rules, simply those of politicians and their servants who are incapable of thinking anything through.