Reply to: Contractor Ltd Company, Only 5% expense?

[malvolio]

WHS. Which is WIS...

Plus, as I said before, if you have a mix of caught and non-caught income, as long as you pay the right tax due on 95% of your caught income, everything else can come out as dividends, you don't have to take it as salary.

You will need to be clear in your records about what belongs where of course. GET AN ACCOUNTANT...

[ASB]

So, I could employ someone who doesn't work anywhere as an office admin or so and pay the tax free allowance as salary from the 95% itself, isn' it? And that is legal, right?

What I want to know is since the it contractor companies doesn't "need" an office admin, is it ok by HMRC for such a company to employ someone and pay salary from the IR35 caught money?

Thanks,
Johny.

Either you're not listening or I'm not explaining very well. Or possibly both !

You don't pay anything "from" the 95% it's just money in the corporate coffers.

If you happen to be outside IR35 and you pay an employee 10k (incl Ers NI etc) then this will reduce your taxable profit by 10k and broadly your CT by 2k. If you happen to be inside IR35 the same applies.

But the major point is that if you have "caught contracts" of say 50k then the company has a deemed payment to make based on 95% of this. The result of this is that effectively the company is paying income tax and NI on 47.5k, irrespective of what it's actual expense are.

So: to the questions I suspect you are really asking:-

1) If you are IR35 caught then employing somebody (cautiously choosing those who have unused allowances) will not reduce your tax burden (I shan't complicate it with the idea that maybe only some of the income is caught).

2) IF you are not IR35 caught then employing somebody will reduce your tax burden. You might have to justify to the IR whos is paid what, but generally if they are noa relative modest salary and actually do some work you won't have a problem.

Of course I think part of your confusion probably comes from the fact that you have multiple income streams, the reselling type thing is not likely to be caught. Thus depending upon the amount of profit this generates then this maybe a chargeable expense. I accept it's a bit confusing, but the bottom line is that your company will pay a minimum tax of PAYE on 95% of it's caught income (if any).

[johnywalker]

1. The real answer is No. The pedantic answer is Yes, you can do that if you like: but it won't affect the Deemed Payment calculation, because that only takes into account Employee-allowable expenses, and 5%. The tax you actually pay must be at least as much as the tax that would be due on the Deemed Payment.

2. No. It is only an element in a calculation designed to see if you need to pay MORE tax. If the calc comes out with less, you just leave it.

3. Travel etc is allowable if it would be allowable for an employee. Accountant is the sort of thing that the 5% is intended to cover.

Thanks a lot Expat.
I did some reselling business as well through my contracting company and generated some income and now its a bit mess, as to whether I could take expenses.

Can I keep my company for business purposes and start a new company just for contracting?

Can I be a non-director for my contracting company so that I pay less NI (I guess the directors are charged more NI) on the 95%?

Thanks,
JOhny.

[expat]

I take your point Malvo. But, I am confused as different people say different things. All I need to know is

1. From the 95% IR35 caught money, can I employ someone and pay them and take the remaining money as my salary ( so that if I get someone who doesn't work anywhere, I can pay them £6035 without paying any tax). Is this allowed by HMRC and normally IT contractor companies are a 1 man company.

2. Can I take the 5% remaining money to my account, just like that? No questions asked by HMRC?

3. Is there any other deductions that I can make like Accountant fee, travel (some where saying that). Is that correct?

Thanks,
Johny.

1. The real answer is No. The pedantic answer is Yes, you can do that if you like: but it won't affect the Deemed Payment calculation, because that only takes into account Employee-allowable expenses, and 5%. The tax you actually pay must be at least as much as the tax that would be due on the Deemed Payment.

2. No. It is only an element in a calculation designed to see if you need to pay MORE tax. If the calc comes out with less, you just leave it.

3. Travel etc is allowable if it would be allowable for an employee. Accountant is the sort of thing that the 5% is intended to cover.

[Bluebird]

So, I could employ someone who doesn't work anywhere as an office admin or so and pay the tax free allowance as salary from the 95% itself, isn' it? And that is legal, right?

yes, but you still pay tax on the 95% regardless of the amount of expenses you incur [ i think ]..

by the way, ask an accountant.

SJD are good.

[johnywalker]

In his case yes, since he clearly doesn't understand the basics. Of course that also means he's not qualified to judge a "decent" accountant...

I take your point Malvo. But, I am confused as different people say different things. All I need to know is

1. From the 95% IR35 caught money, can I employ someone and pay them and take the remaining money as my salary ( so that if I get someone who doesn't work anywhere, I can pay them £6035 without paying any tax). Is this allowed by HMRC and normally IT contractor companies are a 1 man company.

2. Can I take the 5% remaining money to my account, just like that? No questions asked by HMRC?

3. Is there any other deductions that I can make like Accountant fee, travel (some where saying that). Is that correct?

Thanks,
Johny.

[johnywalker]

Absolutely not. It is however necessary that the contractor is taxed on that - i.e. 95% of IR35 caught income.

The company could employ somebody to do some admin or whatever, this *IS* a chargeable expense in terms of the company books. But it does not reduce the amount that the deemed payment will be calculated on.

So, I could employ someone who doesn't work anywhere as an office admin or so and pay the tax free allowance as salary from the 95% itself, isn' it? And that is legal, right?

What I want to know is since the it contractor companies doesn't "need" an office admin, is it ok by HMRC for such a company to employ someone and pay salary from the IR35 caught money?

Thanks,
Johny.

[malvolio]

So the morale of the story is find a decent accountant and let them sort it out for you?

In his case yes, since he clearly doesn't understand the basics. Of course that also means he's not qualified to judge a "decent" accountant...

[ASB]

Thanks. Is it necessary that the contractor itself should take 95% as salary?

Absolutely not. It is however necessary that the contractor is taxed on that - i.e. 95% of IR35 caught income.

The company could employ somebody to do some admin or whatever, this *IS* a chargeable expense in terms of the company books. But it does not reduce the amount that the deemed payment will be calculated on.

[pmeswani]

I already answered that once - do you want me to write it all out again?

http://forums.contractoruk.com/627666-post17.html

So the morale of the story is find a decent accountant and let them sort it out for you?

[malvolio]

Thanks. Is it necessary that the contractor itself should take 95% as salary? My question is if I get someone as Office admin or so, who doesn't work anywhere else, can I pay her £6035 as salary thereby not paying any tax or ni on that?

I use the same company for some reselling business as well, which has generated some income. Can I say that the expenses (rent, council tax, mileage etc) are from that portion of sales? (and not from contracting)

Thanks again.
JOhny.

I already answered that once - do you want me to write it all out again?

http://forums.contractoruk.com/627666-post17.html

[johnywalker]

The 95% has to cover employer's ni, employees ni, income tax. You get what's left after that lot.

So work get the employer's ni rate. Work out what gross salary together with the employer's ni on it come to 95% of your company's earnings and then you've got your gross salary. Then make the calculations for employee's NI, tax etc.

There are calculators on line that will do this for you. Try http://calculator.contractoruk.com/

Thanks. Is it necessary that the contractor itself should take 95% as salary? My question is if I get someone as Office admin or so, who doesn't work anywhere else, can I pay her £6035 as salary thereby not paying any tax or ni on that?

I use the same company for some reselling business as well, which has generated some income. Can I say that the expenses (rent, council tax, mileage etc) are from that portion of sales? (and not from contracting)

Thanks again.
JOhny.

[Hex]

The 95% has to cover employer's ni, employees ni, income tax. You get what's left after that lot.

So work get the employer's ni rate. Work out what gross salary together with the employer's ni on it come to 95% of your company's earnings and then you've got your gross salary. Then make the calculations for employee's NI, tax etc.

There are calculators on line that will do this for you. Try http://calculator.contractoruk.com/

[expat]

When you say travel, can I take car mileage if I travel to work in car and ticket money if I travel by tube?

And when we take 95% salary, how will we pay Employer NI? Or is it calculated along with the 95%. Normal calculations on a total will only deduct employer NI and paye tax. please clarify

Thanks,
JOhny.

You DO need more detail than this, but here's a start:
1. Ignoring IR35 for the moment, your Co pays PAYE as normal, including NICs.
2. To find out whether that is OK or not, you perform this calculation:
a) Co turnover - (allowable expenses) - 5% = deemed salary.
b) tax and NICs on deemed salary.
If the tax + NICs at 2b are greater than those actually paid in 1, you owe the difference.

"allowable expenses" are those trhat would also be allowable for an employee.

[johnywalker]

You can deduct travel and subsistence. All other expenses - training courses, accountancy fees etc. come out of the 5% of the remaining. It's all about being fair, you see.

When you say travel, can I take car mileage if I travel to work in car and ticket money if I travel by tube?

And when we take 95% salary, how will we pay Employer NI? Or is it calculated along with the 95%. Normal calculations on a total will only deduct employer NI and paye tax. please clarify

Thanks,
JOhny.