The new 7.5% dividend tax and how it affects NI

[WordIsBond]

Or use this:

IR35 Insurance

Yes, that's always an option.

But OP is clearly self-insuring, which is a legitimate option especially if you think the risk is quite low.

If you pay QDOS, the money is gone.

If you self-insure, you save the funds for six years, throw them in a solid investment, and if it is never needed, you are going to retire early. You'll lie on a beach somewhere getting skin cancer, so you won't live long enough to spend all that money, but your kids will be able to buy a house. WIN!

(Unless Komrade Korbyn comes to power and impounds all of it when you die, of course.)

[JB3000]

Keeping six years of tax reserves in savings won't make anyone a millionaire, and if they can't take it, maybe they'll take all your other assets instead.

It always makes sense to get the funds out of your company if you can do so tax-efficiently, but saving them once they are out gives peace of mind, and can also lead eventually to early retirement, etc. If OP can comfortably save the funds for six years, he's wise to do so.

Or use this:

IR35 Insurance

[WordIsBond]

you don't want to die a millionaire having lived like a peasant

Keeping six years of tax reserves in savings won't make anyone a millionaire, and if they can't take it, maybe they'll take all your other assets instead.

It always makes sense to get the funds out of your company if you can do so tax-efficiently, but saving them once they are out gives peace of mind, and can also lead eventually to early retirement, etc. If OP can comfortably save the funds for six years, he's wise to do so.

[pr1]

Thanks for the replies. Even if a couple of them were rather obscure. My contracts are low risk, and since from what I can gather from HMRC tests there is no 'no risk'. So I will continue to put money aside but believe I am outside on all counts. You can never be too safe though.

you don't want to die a millionaire having lived like a peasant

if you spend it they can't take it, gogogo

[mtbncar]

Thanks for the replies. Even if a couple of them were rather obscure. My contracts are low risk, and since from what I can gather from HMRC tests there is no 'no risk'. So I will continue to put money aside but believe I am outside on all counts. You can never be too safe though.

[stek]

You are a car (Ltd) driver, there is a roundabout you are approaching. It could not turn inside (a traffic from right) if you are not gambling while driving.

When seagulls follow the trawler it is because they think sardines will be thrown into the sea...

[FK1]

Just seems a little expensive if you think you are most likely outside IR35 but it turns out your inside.

You are a car (Ltd) driver, there is a roundabout you are approaching. It could not turn inside (a traffic from right) if you are not gambling while driving.

It is better act and think as a business and do not worry about IR35 or consider yourself inside IR35 from the beginning.

[FK1]

I assume there is no way after a tax year is complete to change your mind and switch previously paid dividends to a salary?

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

If IR35 applied to previous contracts that you worked on but your company didn’t operate IR35 you should disclose this immediately.

You must pay the tax and National Insurance contributions due, as well as any interest due on these amounts. HMRC may also apply a penalty, which is more severe if it can be proved that you’ve deliberately ignored the IR35 rules or legislation.

If you make a voluntary disclosure it may reduce any penalties you have to pay. Contact the IR35 Helpline for advice on making a disclosure.

[mtbncar]

You are right FK1, I forgot about that allowance.

If you were to pay everything as a salary and nothing as a dividend then you would be liable for national insurances but no dividend tax. However if you pay a lot in dividends as per the example above then you would pay both dividend tax and national insurances.

Just seems a little expensive if you think you are most likely outside IR35 but it turns out your inside.

I assume there is no way after a tax year is complete to change your mind and switch previously paid dividends to a salary?

[FK1]

You receive dividends of around £14160
• You pay the new tax on your dividends of about £1062 (@7.5%)

I think it would be (£14160 - £5000) * 0.075 = £687 as we have £5000 "tax-free dividend allowance".

However I do not see how dividend tax could affect NI. If you want to compare the options that is a different matter.

[mtbncar]

The new 7.5% dividend tax and how it affects NI

Contractors with limited companies who believe they are at low risk of being inside of IR35 and have declared themselves outside for that reason may still, because of the uncertain nature of IR35, decide to calculate and set aside their IR35 liability. Up until the end of the 15-16 tax year if you are paying yourself a salary up to the tax free threshold, paying a little national insurance on this and drawing the rest via dividends, this was a fairly easy sum to calculate. However, as of 16-17 the new dividend tax has added more uncertainty for some.

My question is… If you were to declare yourself outside of IR35 but wanted to put the money aside, would you be able to deduct the money you have paid via the dividend tax from potential NI? (I ask because if someone is paying NI because their income is deemed as employment income, then surely that money can’t be considered company dividend income too?).

A nice simple example for clarity (16-17 tax year):
• You take £30000 in a year
• You have £1500 in expenses
• You pay yourself a wage of £10800
• You pay corporation tax of around £3540
• You receive dividends of around £14160
• You pay the new tax on your dividends of about £1062 (@7.5%)
• You pay about £700 in employee and employer NI on the amount between the NI thresholds and the wage you paid yourself (assuming you don’t qualify for the employment allowance, again for clarity)

Now correct me if I’m wrong but if you did want to calculate the difference for being inside IR35 then it would be (NI rates taken as 15-16 rates):
• 30000 – 1500 – 10800 - 3540 = 14160
• 14160 x 0.138 = £1954 (employer)
• 14160 x 0.12 = £1699 (employee)
• = £3653 total

So would it be £3653?
OR would I be right in thinking that if it was ever decided all your contracts were inside IR35 then the dividends would be treated as a wage so £3653 – 1062 (which you paid in the new dividend tax) = £2591

What do people think?
Tom