Reply to: How I pay 12% Tax

[hugebrain]

What's a PAYE rebate?

Just done the sums on my tax burden. This is for me as a contractor, no dodgy expenses, just legitimate tax avoidance using an LTD paying me + wife with 50% shareholdings.

My Daily rate is £500
Weeks work: say 46

Total annual income ex VAT then:

£115,000

Total Income inc VAT + PAYE rebate:

£135,375

VAT payable (flat rate scheme + 1% discount):
-£13,845

Annual travel @ £7/day:
£1610
...
So I actually earned £115,000
....

Don't know why you think the VAT is some sort of benefit to you. VAT is money the government extorts from you. (HINT, you send them a cheque every three months, not the other way round). So you actually earned £135,125. Congrats on the pay rise. Plus you are even more of a philanthropist than you thought (think of all the needy people you are helping out with your unnoticed generosity)!

More importantly, what's a PAYE rebate and how do I get one?

[IR35 Avoider]

Don't thinkt hat would work - I can imagine HMRC 'lifting the veil' so to speak, and lumbering me with the bill. Might be worht investigating though, it is after all a 'limited company'

I should have made clear - it is only the employer's NI part of the bill that I was speculating might be avoidable.

[ASB]

I found this on the web, based on £475 a day.

I note you didn't map on the figure they use to the rates as set by parliament.

I get these figures (but I'm just an amateur of course):-

Total Fees for the Period 116,400.00

5% Allowance 5,820.00

Total to apply IR35 110,580.00

Er's ni @ 0 on 5035 = 0
Er's NI @ 12.8% on balance = 11977
Taxable Salary = 98603

Employess NI

33540 (UEL) - 5044 (PT) = 28496 @ 11% = 3134
98603 - 33540 * 1% = 650

Tax:

5035 @ 0 = 0
2150 @ 10% = 215
31150 @ 22% = 6853
60263 @ 40% = 24105

Net pay = 63646 [or 57.55% of gross salyart inc Er's NI]

Cash retention = 69466 [or 59.67% of gross billings]

[Edit: I think the main problem in your figures is that the EE's NI is not capped, also your actual retention would be slightly better because the money would probably not be evenly earnt over a 52 week period which could reduce the EE's NI due to the fact it is not normally calculated on an annual basis, thus if you earnt 100k in one week and nothing for the rest of the year you EE's NI bill would only be around 1k.]

[Edit: Er's NI corrected]

[Ivor1]

I found this on the web, based on £475 a day.

£ £

Total Fees for the Period 116,400.00

116,400.00

5% Allowance (5,820.00)

Total to apply IR35 110,580.00

Less: Employers NI (3 months) 12,011.12

Gross Salary - 98,568.88

Per month = 8,214.07

Less: Employees NI
857.39 @ 11% 857.39
0.00
857.39 (857.39)

PAYE (tax code 503L M1)
419.58 @ 0% 0.00
215.00 @ 10% 21.50
2,595.83 @ 22% 571.08
4983.66 @ 40% 1,993.46
8,214.07 (2,586.05)

NET SALARY PER MONTH 4,770.63 = 49%

[ASB]

How do you manage 35% ? I had my figures looked at to see what I would take home if inside IR35, using the full 5% allowance, and it came in as a take home about 49% , 51% fecking tax. Really question if its worth the hassle these days.

It rather depends on how much you are earning.

The retention rate the first 5035 is 100%.

The next 2425.20 yields 2150 after Er's NI and 1698.50 after tax/NI (21%) = 70.03%
The next 35137.48 yields 31150 after Er's ni and 20870.50 after tax/NI (33%) = 59.39%
Each subsequent 1128 yields 1000 after Er's ni and 590 after tax/ni (41%) = 52.30%

To keep to a 65% retention billing around 40k will do it.

I don't see anyway of actually paying > 49% in tax on any slice. Even on 100k you should still get a net yield of 58k.

If you think you are only going to retain 49% of what you bill you might want to check your figures again.

That's not to say I think the amount paid is right of course.

Edit: Er's NI

[dude69]

I would worry about S660A if I were you, but as you say you are aware, I won't say to much. (But do you know that if the court case is lost, or even if it's won but you are caught because your circumstances are slightly different, that any dividends you pay now are vulnerable to tax for several years to come? If caught you might have to pay higher-rate tax on the past six years worth of wifely dividends? I only ask because you seem to be saying that S660a is something you only intend to worry about looking forward.)

Rather than retain earnings in the company, why not bung the excess in your pension. That way the company is worth nothing, so if HMRC do ever unexpectedly stick you for IR35 the company will have nothing to pay them with. (I don't know if this will work - just an idea to run past your accountant.)

Don't thinkt hat would work - I can imagine HMRC 'lifting the veil' so to speak, and lumbering me with the bill. Might be worht investigating though, it is after all a 'limited company'.

S660a I am deferring as long as possible: I won't paid out more than a single person's basic rate allowance until the last day of the tax year, to defer the decision as long as possible in case S660a is decided in HoL in the mean time.

Personally I can see HMRC losing and then introducing non-retrospective legislation for next tax year, which wouldn't be too bad.

[Ivor1]

How do you manage 35% ? I had my figures looked at to see what I would take home if inside IR35, using the full 5% allowance, and it came in as a take home about 49% , 51% fecking tax. Really question if its worth the hassle these days.

[TheMonkey]

I have come to the conclusion that paying full whack tax via PAYE and charging clients more is the solution to the problem which won't cause you any anal soap-on-a-rope problems with HMRC. Currently my company end of year is targeting a profit, with all debts and invoices settled, of £0.33! Looking at that my magic number is around 35% which isn't so bad when you actually look at the incoming cash into my personal account every payroll run.

I think complexity ultimately leads to problems, especially with tax. My solution is to charge more!

[IR35 Avoider]

I would worry about S660A if I were you, but as you say you are aware, I won't say to much. (But do you know that if the court case is lost, or even if it's won but you are caught because your circumstances are slightly different, that any dividends you pay now are vulnerable to tax for several years to come? If caught you might have to pay higher-rate tax on the past six years worth of wifely dividends? I only ask because you seem to be saying that S660a is something you only intend to worry about looking forward.)

Rather than retain earnings in the company, why not bung the excess in your pension. That way the company is worth nothing, so if HMRC do ever unexpectedly stick you for IR35 the company will have nothing to pay them with. (I don't know if this will work - just an idea to run past your accountant.)

[xoggoth]

That's nothing! I have a cast-iron scheme to get the first £30k of earnings totally tax free.

[Ivor1]

work for an investment bank. And cut out the middle man.

Easily hit £500 a day in the city without the middleman espiasally at the moment, loads of work out there £500 to £600 aday in the city.
But then again its all relative ie cost of living, £370k for a crappy 3 bedroom in a nice'ish area.

Being a BA in the city is where the money is relative to the amount of work you do, £600 - £650 aday.

[VectraMan]

Assuming you can get away with that and don't withdraw all the money, which you haven't factored into your calculation. If you take all the money as divs and don't do the S660 fiddle, then by my very rough calculation you have an extra £17K to pay in tax, and that increases your magic number to 26%. I think.

[dude69]

SAP or Proj Mgmt stuff at the mo

just standard City asp.net here. No special business knowledge. The agents putting standard people forward (good .NET, not gurus) at £450 + 15% fee. I cut out the middle man, so no fee on me.

[dude69]

Interesting....but....

You are not really comparing like with like. In the Ltd Co scenerio you are looking at Company money, in the PAYE scenario you're looking at personal money.

A couple of expenses you seem to have left out of the Ltd Co scenario
- accountants fee
- insurances

Also, some things you are likely to get as a perm not catered for in the Ltd Co scenario:
- pension contributions
- life insurance
- private health care

I also think 46 weeks working a year is an overestimate. There are about 250 working days in a year and in a perm job probably 25 days vacation, so more realistic to work on 225 days for a like-for-like comparison.

My father is an accountant so that's free. The insurance is minimal does cut the profit by about 0.3% I guess, not too major though.

I didn't have life cover at my last job, and declined the private health cover because I didn't want to pay 40% of its cost as it wasn't worth it to me as I'm unlikely to use it.

[Pondlife]

Out of interest, what does one have to do to get a daily rate of 500?

What I do, pays around 275. With the current client, getting that much was a struggle.

tim

SAP or Proj Mgmt stuff at the mo