Autumn Statement 2016

[d000hg]

What about the risk we have that those others you mention don't? Or the healthcare , holiday, sick pay. Training, job security ? The insurwnces we have to keep etc

We may earn similar but our contracts are not similar

That is your choice, as a business you have higher risk for higher reward. That isn't an argument for preferential tax treatment.

If you don't like the risk, run back to a permie job!

[d000hg]

Do we? We pay a bit less, but not a great deal less.

We have some flexibility that employees don't have (e.g. the ability to defer taxation by only drawing dividends as we need), there are certain things we can claim as expenses that employees can't usually and some of us may have further scope to save tax by issuing shares to a partner etc. but in general there isn't a massive difference and of course we don't have any of the same sorts of guarantees of income or other employment rights and perks as an employee.

A quick calculation suggests that on a £100k turnover, assuming zero expenses to keep things simple and a basic salary of £8060 and the rest taken in dividends, you'd pay £18,388 in corporation tax and £14,574 in income tax leaving you with a take-home of £67,038.

OTOH a £100k salary taxed as PAYE would result in tax and employees NI of £34,533 giving you a take-home of £65,467 - only a couple of grand less.

Its not a perfect comparison - an average contractor would have some expenses. My average annual costs are about £5k and I don't travel much. But the government is also making an additional £12k in employers NIC from the employee!

Of course, I acknowledge in practice many contractors may choose to only take dividends up to the higher rate threshold, build up a warchest and potentially withdraw the retained profit as a capital distribution at some point in the future, subject to a much favourable tax rate, but why shouldn't we?

Great analysis, thanks. Is that including current dividend taxes? If it is then that surely agrees with my point we are NOW treated fairly equally sorry if that wasn't communicated well.

If we look at a lower earning contractor pre dividend tax, they could basically pay zero income tax, zero NI meaning they took home what, 40k paying ONLY 20% CT IIRC. Maybe the more you earn, the less advantage you have/had over an equivalent permie?

[youngguy]

That is your choice, as a business you have higher risk for higher reward. That isn't an argument for preferential tax treatment.

If you don't like the risk, run back to a permie job!

Well it is no longer higher risk, higher reward...it is higher risk similar reward, maybe even worse.

And my point was to counter yours which is that we are broadly the same, whereas we are not under the same T&Cs yet Gov want to tax us the same.

I'm in the private sector now but if/when it rolls out there I may well go back to perm, depending on the figures!

[d000hg]

Well it is no longer higher risk, higher reward...it is higher risk similar reward, maybe even worse.

So go be a permie. For about half the salary... oh wait you conveniently forgot that part right?

I'm saying people earning the same amount should pay the same tax on it. True a contractor earning £100k might be doing so at higher risk than a permie on £100k... but that contractor would not be on anything like £100k if THEY were a permie. So they get to earn a lot more by being a contractor, with more risk. And then they pay tax on their greater income like everyone else.

"I want to earn twice as much AND get a tax incentive to do so because I'm taking all this risk" doesn't sound right to me. If you don't like the risk, get a £50k job with annual reviews, 30 days holiday and an employer-funded pension.

The argument "I might not earn much next year so I should pay less tax when I earn a lot to balance it out" is also duff IMO. Because as a previous poster pointed out, when we're earning well we can store that up in the company and take income up to the HT threshold, and then in a year with lots of bench time we can do that from retained profit. So I'd say that just about balances out - our earnings may vary wildly but on the other hand we can benefit from that from a taxation point of view.

[teapot418]

Because as a previous poster pointed out, when we're earning well we can store that up in the company and take income up to the HT threshold, and then in a year with lots of bench time we can do that from retained profit.

But if caught by IR35, you cannot do that - there is no retained profit.

[munkee]

So go be a permie. For about half the salary... oh wait you conveniently forgot that part right?

I'm saying people earning the same amount should pay the same tax on it. True a contractor earning £100k might be doing so at higher risk than a permie on £100k... but that contractor would not be on anything like £100k if THEY were a permie. So they get to earn a lot more by being a contractor, with more risk. And then they pay tax on their greater income like everyone else.

100% agree. For me the statement makes 0 difference to my choice regarding staying in contracts. If I'm within ir35 for some engagements that's fine. The ceiling salaries in permie world are too low for me to consider going back and I couldn't deal with annual review politics for the foreseeable future.

I walk away with more money in my pocket and I can choose where that money gets funneled into.

[d000hg]

But if caught by IR35, you cannot do that - there is no retained profit.

True, that aspect goes out the window but in that scenario you are worse off anyway. Comparable income taxation is reasonable. Punitive taxation is not.

[youngguy]

So go be a permie. For about half the salary... oh wait you conveniently forgot that part right?

I'm saying people earning the same amount should pay the same tax on it. True a contractor earning £100k might be doing so at higher risk than a permie on £100k... but that contractor would not be on anything like £100k if THEY were a permie. So they get to earn a lot more by being a contractor, with more risk. And then they pay tax on their greater income like everyone else.

"I want to earn twice as much AND get a tax incentive to do so because I'm taking all this risk" doesn't sound right to me. If you don't like the risk, get a £50k job with annual reviews, 30 days holiday and an employer-funded pension.
.... Because as a previous poster pointed out, when we're earning well we can store that up in the company and take income up to the HT threshold, and then in a year with lots of bench time we can do that from retained profit. So I'd say that just about balances out - our earnings may vary wildly but on the other hand we can benefit from that from a taxation point of view.

I get what you are saying and I agree with some elements.

The FRS was a 'bonus' and if that's gone then so be it.
Income tax changes and whilst I don't like it that is life and we all (perm or otherwise) have that happen.
What I do object to however is the logic of being treated as both an employee for tax and then a business for corp tax, vat,insurances etc. That puts us at quite a disadvantage to either perms or 'real' businesses. We will struggle to balance things out under this new regime. Umbrella's look more attractive , as do perm roles and contracting will most likely decline. Of course if that's what Gov want then so be it.

I also object to the logic that a ps contractor is not paying the correct taxes yet someone in the private sector doing exactly the same is out of scope. I know why they are only tackling ps for now, but it does not follow logic that they allegedly want to tackle this issue on one sector but don't want to do the same and have fairness in another.

[TheCyclingProgrammer]

Great analysis, thanks. Is that including current dividend taxes? If it is then that surely agrees with my point we are NOW treated fairly equally sorry if that wasn't communicated well.

If we look at a lower earning contractor pre dividend tax, they could basically pay zero income tax, zero NI meaning they took home what, 40k paying ONLY 20% CT IIRC. Maybe the more you earn, the less advantage you have/had over an equivalent permie?

True, but even pre-dividend tax, below the higher tax threshold the only difference was the NICs.

[munkee]

I've seen a few people mentioning umbrellas will become popular. Is there a rough comparison which essentially says that you are potentially better off going that route now rather than running your ltd? I had always thought running through an umbrella for those gov roles would have been the safest route, even if I kept my ltd ticking over in the background for when I went back to private sector.