Operating inside IR35

[DonkeyRhubarb]

OK, so pension is the only real tax mitigation strategy inside IR35.

Now that it's much easier to get money out of a pension at 55, it's quite a good option.

[jamesbrown]

Thanks. The OP in that case was only talking about leaving a portion of the 5% expense allowance in the company.

What about leaving a much bigger amount in the company (say 50%)? Does being inside IR35 require all of the income, bar the 5% expense allowance, to be paid out as salary under PAYE?

This was answered by Contratax. There's no obligation to pay the money out via PAYE during the year (although you do need a PAYE scheme), but the deemed payment will apply at the end of the year, so I can't see the logic of leaving any already-taxed money in the company, plus you have the hassle of reconciling this to the taxes already paid when it is eventually extracted.

More info here:

https://www.gov.uk/guidance/ir35-wha...-if-it-applies

[northernladuk]

All the profit is considered income and taxed as such. Leaving it in the company doesn't make a difference unless you plan not to pay the correct tax which is evasion. IR35 is about personal taxation.

[DonkeyRhubarb]

Like this?

http://forums.contractoruk.com/accou...side-ir35.html

Thanks. The OP in that case was only talking about leaving a portion of the 5% expense allowance in the company.

What about leaving a much bigger amount in the company (say 50%)? Does being inside IR35 require all of the income, bar the 5% expense allowance, to be paid out as salary under PAYE?

[northernladuk]

If you are operating inside IR35, can you leave money in the company, in a tax efficient way, to build up a warchest?

Like this?

http://forums.contractoruk.com/accou...side-ir35.html

[DonkeyRhubarb]

If you are operating inside IR35, can you leave money in the company, in a tax efficient way, to build up a warchest?

[WordIsBond]

I've often wondered, is there a way to operate inside IR35 and minimise tax and class 1 primary & secondary nics?

For example, suppose you were invoicing £100k p.a. + vat but you only needed £30k p.a. to live off.

Obviously one way would be to max your pension contributions but are there other legitimate means?

There's not much you can do.

You can take 5% off the top (before pension contributions, etc.). So that's £5K. Max out your pension and you are at £45K that you've protected. £55K left.

You can take any expenses incurred by your company which could have been claimed if you had incurred them as an employee of the engager. T&S, home office if you ever work from home for the engager. If you don't have any WFH for them, I'm not sure you can claim home office expense against IR35 even if you use it as an office for other work.

You can take any capital allowances incurred which could have been claimed if you had incurred them as an employee of the engager. I think this means if you are going to need a new laptop before long, you should buy it out of IR35 funds.

Other than that, I don't know of anything. Maybe payments for a relevant life plan, I don't know if you are allowed to take that out of the deemed payment amount or not.

[DonkeyRhubarb]

I've often wondered, is there a way to operate inside IR35 and minimise tax and class 1 primary & secondary nics?

For example, suppose you were invoicing £100k p.a. + vat but you only needed £30k p.a. to live off.

Obviously one way would be to max your pension contributions but are there other legitimate means?

[ContrataxLtd]

Thanks. So actually operating PAYE is the only way to do it.

Is essence yes, PAYE is the only way to go.

You can chose not to operate PAYE and just calculate the 'deemed payment' at the tax year end (still need a PAYE scheme) and basically just pay the TAX/NI that would have been due had you operated PAYE and retain the funds in the company or pay out as dividends. However, you then have to mess around on your tax return exempting some of those dividends from tax because they've already been taxed in effect by the deemed payment, the net result being that you pay the same amount of tax as you would have done just taking it all via PAYE anyway.

Martin
Contratax Ltd

[VectraMan]

The same rules apply for director's loans so you can't simply take out what you want and put it on your self assessment, you can only withdraw Salary/Expenses/Dividends with anything else going to your loan account.

Thanks. So actually operating PAYE is the only way to do it.

[ContrataxLtd]

Without getting into an argument as to why, how do the mechanics of being inside IR35 work with a Ltd. company?

I understand you get to keep 5% for expenses whether you have those expenses or not, and you can gain a bit from the VAT FRS. So anything left over from that 5% and FRS is profit in the usual way which you pay CT on and can pay the rest as dividends.

As for the 95%, obviously you can register for PAYE and pay it all out as salary. But can you simply help yourself to the money and put it on your SA later? If I remember correctly the SA asks for employment income, which requires a company PAYE registration number, and about dividends, but I'm not sure how you'd enter income that falls under IR35. I.e. is it necessary for the company to be PAYE registered?

And then when it comes to the annual accounts/CT, the 95% is simply a cost as if it were salary?

Hi VectraMan

The easiest way to operate IR35 is to calculate what should be paid in salary each month and put that through payroll, you don't have to mess around with deemed payments etc. so this does mean you'd need a PAYE scheme.

It's probably easier showing things as an example:

Turnover: £100,000
5% Allowance: (£ 5,000)
Pension: (£ 40,000)
T&S: (£ 10,000)
Salary/ER NI £ 45,000

From the £45,000 salary you'd have to cover employers NI which would be £2,715 (I've assumed employment allowance is available, this is subject to debate though which i won't go into here) leaving £42,285 to go through payroll as the gross salary subject to tax/ee NI personally.

This would leave you approximately £31,841 to spend personally.

The 5% allowance (£5,000) would cover any non qualifying expenses which are basically anything that a normal employee can't claim tax relief on like accountancy etc. and any profit from this would be subject to CT with the balance available as a dividend if required.

I've assumed the FRS profit is included within the £100,000 turnover to simplify things.

Obviously this is a very simplified example but should help give you a feel of how things work in practice. I've also used current rates, assumed the company year matches the tax year etc.

The same rules apply for director's loans so you can't simply take out what you want and put it on your self assessment, you can only withdraw Salary/Expenses/Dividends with anything else going to your loan account.

Let me know if you have any other questions.

Martin
Contratax Ltd

[Contreras]

Without getting into an argument as to why, how do the mechanics of being inside IR35 work with a Ltd. company?

I understand you get to keep 5% for expenses whether you have those expenses or not, and you can gain a bit from the VAT FRS. So anything left over from that 5% and FRS is profit in the usual way which you pay CT on and can pay the rest as dividends.

As for the 95%, obviously you can register for PAYE and pay it all out as salary. But can you simply help yourself to the money and put it on your SA later? If I remember correctly the SA asks for employment income, which requires a company PAYE registration number, and about dividends, but I'm not sure how you'd enter income that falls under IR35. I.e. is it necessary for the company to be PAYE registered?

And then when it comes to the annual accounts/CT, the 95% is simply a cost as if it were salary?

The 95% doesn't have to be paid out as salary. It can stay in the company - not sure the mechanics of this but presumably it gets IR35 taxed at year end. What's left over can be paid as dividends as normal, or retained in the co.

Don't forget that currently T&S expenses are also allowable before the 95% is applied.

You can of course just pay it all as PAYE, but pension contribs work too, and AFAIK these do not need to be apportioned between IR35/non-IR35 work. E.g. £10k pa. salary + £40k pa. pension + £7k T&S (contract specific) means no charge on IR35 turnover in that year up to ~£60k.

[VectraMan]

If this is a single contract would going brolly be an option at all? It may give you the option to close the limited down and make use of some efficiencies that would far outweigh the extra charges from the brolly and let you start with a cleaner slate when everything hits in a year and two?

Sounds like an argument as to why.

Ltd. costs me £6pm in bank charges, plus £14 once a year, and gains money from the FRS and the 5%. Umbrella is £100pm probably. Probably no point starting a Ltd. for an inside IR35 contract, but if you already have one...

[northernladuk]

If this is a single contract would going brolly be an option at all? It may give you the option to close the limited down and make use of some efficiencies that would far outweigh the extra charges from the brolly and let you start with a cleaner slate when everything hits in a year and two?

[VectraMan]

Without getting into an argument as to why, how do the mechanics of being inside IR35 work with a Ltd. company?

I understand you get to keep 5% for expenses whether you have those expenses or not, and you can gain a bit from the VAT FRS. So anything left over from that 5% and FRS is profit in the usual way which you pay CT on and can pay the rest as dividends.

As for the 95%, obviously you can register for PAYE and pay it all out as salary. But can you simply help yourself to the money and put it on your SA later? If I remember correctly the SA asks for employment income, which requires a company PAYE registration number, and about dividends, but I'm not sure how you'd enter income that falls under IR35. I.e. is it necessary for the company to be PAYE registered?

And then when it comes to the annual accounts/CT, the 95% is simply a cost as if it were salary?