Reply to: Change in salary after tax year end - tax question

[Syntyrion]

I have asked them for an exact explanation. Will let you know where it comes out. Thanks for the advice / feedback.

[TheCyclingProgrammer]

Part of your accountant's job is to help you save paying unnecessary tax whilst staying within the rules.

Suggesting you pay yourself a salary when you have used up your personal allowance and to pay dividends when they would be charged at the higher rate and you don't actually need the money would seem rather counter to the above.

Leave the profit in your company for a rainy day, start paying salary in the new tax year, possibly get a new accountant.

[Jessica@WhiteFieldTax]

Rubbish...no basis in fact whatsoever

Agree.

@OP - its your company, you decide

[Sausage Surprise]

Hi. Though I have been lurking for some time, this is my first post.

I have recently gone contractor after being permie for all my career. I have a tax question (I am not sure my current accountants are getting it right), so would be grateful if anyone knows (I don't really want to pay for two sets of accountants, and am kind of tied to the current lot for now).

I had a pretty well paying permie job but decided to leave that for some of the usual reasons. My taxable income (which includes some property rental income) for the year since April 2014 is (just) over 100k; I would prefer to take all the excess over 100k and stick it in a pension so as to avoid the "60% band", and not pay myself anything at all (salary or divs) until 6 April (living off savings, effectively).

The current (contractor) accountants have said that I am more likely to face an investigation from HMRC if I pay low/no salary now and then suddenly ramp it up to (around) £830 pm in the new tax year. However, I spoke with a friend who is an accountant (but not a "contractor specialist") and he reckons this is not correct, and that it would be fine to pay myself nothing until April and then start paying a salary and take some dividends.

Any thoughts / advice? Any experience of this happening?

Thanks.

Rubbish...no basis in fact whatsoever

[Alan @ BroomeAffinity]

I don't have too much trust in them, but ... in my field (not IT) it is a minefield for getting PI cover (or prohibitvely expensive). The accountants have been able to get cover for me (they have a deal with a broker/underwriter, it seems) - so to enable me to do contracting at all I am a bit stuck with them for the foreseeable future at least.

Well, if you now have the cover, you also have the broker/underwriter details. And most accountants have good PI contacts.

[Syntyrion]

This seems to be an interesting accountant/client relationship you have. It's seems odd to me that you question the advice, clearly have no confidence in what you are being advised, yet you aren't willing to change, or indeed risk offending him by questioning his advice. Ask him to explain his reasoning (which seems flawed to me, but I don't have all the info), and if you're still not happy, a) stick to your guns, or b) bin him and get somebody you can have a conversation with.

I don't have too much trust in them, but ... in my field (not IT) it is a minefield for getting PI cover (or prohibitvely expensive). The accountants have been able to get cover for me (they have a deal with a broker/underwriter, it seems) - so to enable me to do contracting at all I am a bit stuck with them for the foreseeable future at least.

[Alan @ BroomeAffinity]

This seems to be an interesting accountant/client relationship you have. It's seems odd to me that you question the advice, clearly have no confidence in what you are being advised, yet you aren't willing to change, or indeed risk offending him by questioning his advice. Ask him to explain his reasoning (which seems flawed to me, but I don't have all the info), and if you're still not happy, a) stick to your guns, or b) bin him and get somebody you can have a conversation with.

[JRCT]

I think it might be related to also having them look into income shifting to the other half... I guess if MyCo has already paid at least one salary to each director (myself and the other half) then the horse has bolted and it would need to continue to do so? Or is that not necessarily true and we can just see that as a "once off" and have MyCo start paying it all later?

And how do I say to my accountants that "despite your advice, MyCo won't be paying salaries to myself and wife for the rest of the tax year"??

What has your wife's salary got to do with your situation?

You can pay her salary (assuming she's 'working' for your Ltd) without paying yourself, and vice versa.

[TheFaQQer]

I think it might be related to also having them look into income shifting to the other half... I guess if MyCo has already paid at least one salary to each director (myself and the other half) then the horse has bolted and it would need to continue to do so? Or is that not necessarily true and we can just see that as a "once off" and have MyCo start paying it all later?

If it's gone through RTI already, then it will count as salary already paid. But you can stop the payroll at any stage - I've done it after extended periods of bench time.

And how do I say to my accountants that "despite your advice, MyCo won't be paying salaries to myself and wife for the rest of the tax year"??

You are the client, and it's your neck on the line. My accountant provides advice - some I take, some I ignore, but always from a position of understanding what and why they are suggesting something. For example, in the past they have suggested paying NMW which I have declined.

If the accountant cannot accept that, then fire them and move on.

[Syntyrion]

...

The only problem I can see is that if you were inside IR35 then you have to pay it out as PAYE anyway, once you have deducted expenses. But if you're going to stick it all in your pension anyway, then the whole thing becomes a moot point - pension is an allowable expense.

I guess it's a question of how much I (have to) stick in the pension...

[Syntyrion]

I think it might be related to also having them look into income shifting to the other half... I guess if MyCo has already paid at least one salary to each director (myself and the other half) then the horse has bolted and it would need to continue to do so? Or is that not necessarily true and we can just see that as a "once off" and have MyCo start paying it all later?

And how do I say to my accountants that "despite your advice, MyCo won't be paying salaries to myself and wife for the rest of the tax year"??

[Maslins]

Am sure everyone that has gone from permie to contractor has done this (if I am reading the scenario right).

That's what I thought. Loads of our clients did something similar at least with regards to not taking a salary for the remainder of the tax year that they start as a contractor.

[Craig@Clarity]

Change in salary after tax year end - tax question

I think you'd be fine to hold off and not pay yourself anything until the new tax year. With your permie income, you'll have paid enough NI in this tax year to qualify for benefits in future if it came to it. Note that if you're a director of your own PSC, then you don't have to adhere to NMW. From a tax efficient point of view, you'd be ok to live off your savings, wait until 6 April 15 then start paying yourself salary/divi's etc.

IMHO, your accountant is being too cautious and painting you with the same brush as someone who hasn't just left a permie role and started up with a huge taxable income already. Ask them to advise you on "your" specific circumstance and plan your affairs to what your objectives are.

[JRCT]

My first contract was a few months into the year and I'd earned around £25k from my previous perm role.

My accountant specifically advised me NOT to take a salary from my ltd (divs only) in that first year because I'd already used up my tax free allowance.

[TheFaQQer]

Am sure everyone that has gone from permie to contractor has done this (if I am reading the scenario right).

Here is a search with similar questions...

https://www.google.co.uk/webhp?sourc...ntractoruk.com

I started my first contract at the start of April, so I didn't have any such issues. Plus, I was so underpaid that earning £100k+ a year permie wasn't going to be a problem.