Reply to: Newbie - how much should I pay myself after redundancy payout

[IR35FanClub]

And as mentioned by IR35FanClub, consider making a personal pension contribution (e.g. SIPP) to mitigate against the higher rate tax, again the accountant can advise how much.

Ah SIPPs. Never used them as I've never had enough profits to stick in - specifically I'm looking to buy overseas commerical property one day. However when looking at property (as opposed to shares) you have to have a big enough pot to make the yearly revaluation charges worth it. I think I've seen figures around the £50k mark if you are buying something simple in the UK... but £100k if you are having to get overseas valuations and so on.

Personally - I've stopped contributing to my pension since the gov changed the minimum age you ca get at the. I was so pissed off that since the ag of 19 I'd been paying in to get at my fund at age 50, and they upped it to 55. That is a private pension where I had an arrangement with the fund. By the time I'm 55 I wouldn't be surprised if they've upped it to 65!

I decided that property was my best bet... even if it becomes worthless - at least I can go and live in it / take holidays. A shareportfolio of 1,000,000 shares might have been useful in the 1980s if it became worthless - as you could still wipe your a** on it, but theses days its all on computers.

So consider pensions as a way of tax mitigation, but remember you are giving up control on when you can get the money. Actually - I did find out that if you are terminally ill you can get it... so pop off to a dodgy third world country - get a doctor to declare you as dying (for a fee) and you can probably enjoy your retirement there.

[Contreras]

Well I've certainly had a tax free lump sum from a compromise agreement in the past, and I know many others who've had the £30k tax free lump sum and been pushed into high rate tax after taking voluntary redundancy.

Assume £42k annual salary, by itself just below the high rate tax threshold. Say 3 months received as salary = £14k (so the NI stamp is taken care of). Redundancy payout say equates to 18 months = £61k. Total = £75k, of which £30k tax free and £45k taxed just breaching the high rate threshold.

From another thread it seems the OP has now started a Ltd Co., so hopefully has either engaged an accountant or at the very least consulted one.

If not done already, for peace of mind it would really make sense for the accountant to work through the above figures in case any wrong assumptions have been made. Most accountants would be happy to do this in an initial chat I think. Clearly it has an impact on advice wrt withdrawing money from the new Ltd Co.

And as mentioned by IR35FanClub, consider making a personal pension contribution (e.g. SIPP) to mitigate against the higher rate tax, again the accountant can advise how much.

[SueEllen]

(And I think contractually entitled could include the situation where you agree to take a payment for going quietly.)

This case is definitely excluded.

Any form of compromise agreement is a voluntary payment.

[IR35 Avoider]

Just had a quick read , becauase I thought the same when I got made redundant - but your first 30k of redundancy is tax free. It's not treated as income and added to your salary.

Have not read the link, but one wrinkle with the 30K is that it has to be a discretionary (i.e. voluntary) payment by the company, if you are contractually entitled to it then it's not tax free. (And I think contractually entitled could include the situation where you agree to take a payment for going quietly.) I would think the ex-employer would know whether it's tax-free, if not presumably they would use payroll to deduct taxes.

[IR35FanClub]

Hi,

I'm a newbie who's considering going contracting with a LTD Co. or using an Umbrella (for ease).

I have recently been made redundant which has instantly taken me over the 40% tax threshold (first time ever - always been just under).

If I go the LTD route, what is the most tax efficient way to pay myself (if at all - maybe just leave the money in the company?). How much should I pay myself bearing in mind I'm now in the higher tax bracket. I also want to ensure I'm paying NI contributions to keep my pension topped up - so I assume I will have to pay myself something to enable this.

Thanks for your advice.

Just had a quick read , becauase I thought the same when I got made redundant - but your first 30k of redundancy is tax free. It's not treated as income and added to your salary.

On the off chance you have been working somewhere 20 odd years and are getting a 50k payout on top of your £30-45k normal salary, look at pensions. Or ask them if they'll make you redundant on 6th of April next year (or a bit later). Then your additional redundancy payment will be taxed at 20% and you can leave the difference between your "excess" i.e. over 30k redundancy in the company. I.e. if you can "survive" on £38k in your pocket next year, there's not much point taking money as redundancy this year.

[IR35FanClub]

I thought I was getting my head around this but I've been told (by another contractor so may not be a 100% reliable source ) that I MUST pay myself regulary (monthly at very least, minimum wage) otherwise it will look suspicious and "may" not be legal. Also, not giving myself a wage will mean that my NI contributions won't be topped up.

Do I have to pay myself? Would it be legal and more beneficial to leave the money in the company until a new tax year.

Not true about having to take salary - my first year of contracting I paid myself nothing till year end (I was married then and had a wife to support me in the mean time). Contracting took its toll on the marriage and then I needed to take some money. But still didn't take a salary. I used to take a dividends about twice a year.

I've now signed up with an online accounting company (not going to advertise them till I've done a full year with them and checked they work out ok) and take a basic salary each month - just because it's easy to administer. I've read this and that about what you should do. I think the reality is - HMRC will investigate you for all sorts of reasons, but, even though I've screwed and VAT returns twice and got fined a couple of times for late payments of CT and SA, I've not yet been investigated. (Those screwups are why I now use the online package as it's all done for me automatically based on what I've raised as invoices in the system).

I did do some work at HMRC on their risk systems once - and my feeling was although you can trigger the investigation system, they'll have a look at your turnover and time you've been trading and think, we'll hang on a few more years till we investigate and then get the "lying cheating barsteward" as we are known.

PS Have you looked at ways of shielding your redunancy payment from tax? VCTs Pensions etc?

You certainly want to get used to keeping your income below the 40% threshold by taking a dividend of about 31k and salary of about 7.5k. Leave the rest in the company to build up an "on the bench/company expansion/year off touring the world" pot.

Read Tim Ferris "4 hours work week" Not coz that's feasible, but the idea of taking lots of mini retirements now, not waiting till you are too unhealthy to enjoy wining the world latin dancing competition or taking an intensive 3 month japenese course - in japan.

I keep telling myself I'm going to do that when I get the equivalent of a years salary, er, sorry - invoices, in the company reserve.

[Clare@InTouch]

I thought I was getting my head around this but I've been told (by another contractor so may not be a 100% reliable source ) that I MUST pay myself regulary (monthly at very least, minimum wage) otherwise it will look suspicious and "may" not be legal. Also, not giving myself a wage will mean that my NI contributions won't be topped up.

Do I have to pay myself? Would it be legal and more beneficial to leave the money in the company until a new tax year.

You don't have to pay yourself any wages at all if you don't want to, national minimum wage regulations don't apply to directors. Your NI contributions for this year should already be covered by what you've already received from the previous employment.

It's certainly not illegal to not pay wages.

[cojak]

But not out of your redundancy money, right?

That's your money, not your company's.

[Derben]

As Mal says, an Umbrella will result in you being paid as an employee, so there's option regarding tax efficiency.

You could set up a limited company and leave all profits within the company until next year, that way you won't have any further income personally this year. You only need 30 years to qualify for a state pension, so that may not be an issue..

I thought I was getting my head around this but I've been told (by another contractor so may not be a 100% reliable source ) that I MUST pay myself regulary (monthly at very least, minimum wage) otherwise it will look suspicious and "may" not be legal. Also, not giving myself a wage will mean that my NI contributions won't be topped up.

Do I have to pay myself? Would it be legal and more beneficial to leave the money in the company until a new tax year.

[Contreras]

I agree, unless they're also regulated by the FSA they shouldn't be advising or selling insurance. It's just letting them know it's required by the contract. Whether it's actually purchased or not is up to the contractor.

Things to look for in a contract:

- Payment Terms.
- Notice Periods (or lack of).
- Key IR35 Pointers.
- ...
- ...
- ...
- ...
- PI insurance.

In that order, roughly speaking.

IMHO, YMMV.

[Andrew at Boox]

Of all the things I might ask from an accountant, contract review is not one of them.

If my accountant tried to sell me "insurances" then I'd probably be looking for a new accountant.

I agree, unless they're also regulated by the FSA they shouldn't be advising or selling insurance. It's just letting them know it's required by the contract. Whether it's actually purchased or not is up to the contractor.

[Contreras]

Also, if you're going to be chatting to a few contractor accountants to get advice be sure to ask about insurances. So often we review contracts that aren't compliant with insurance requirements on the project (I'm talking about PI mainly)

Of all the things I might ask from an accountant, contract review is not one of them.

If my accountant tried to sell me "insurances" then I'd probably be looking for a new accountant.

[kingcook]

You only need 30 years to qualify for a state pension currently, so that may not be an issue.

FTFY

[Andrew at Boox]

If you have received at least £5564 (gross) salary from your permie employment since April then you already have your NI stamp for this year.

Any further dividends or salary paid this year would be taxed at the higher rate. If you work the contract through your own Ltd Co. then it's possible to retain any income within the company until next tax year. Going through an Umbrella Co. does not have this option.

Of course it depends on individual circumstances but I would say going Ltd is a no brainer in this case.

It's not difficult to set up a Ltd yourself, but speak to an accountant (or 3) for some initial advice anyway. They should also advise on the most tax efficient way to pay yourself and it doesn't cost anything for an initial chat.

Also, if you're going to be chatting to a few contractor accountants to get advice be sure to ask about insurances. So often we review contracts that aren't compliant with insurance requirements on the project (I'm talking about PI mainly)

[Contreras]

How much should I pay myself bearing in mind I'm now in the higher tax bracket. I also want to ensure I'm paying NI contributions to keep my pension topped up - so I assume I will have to pay myself something to enable this.

If you have received at least £5564 (gross) salary from your permie employment since April then you already have your NI stamp for this year.

Any further dividends or salary paid this year would be taxed at the higher rate. If you work the contract through your own Ltd Co. then it's possible to retain any income within the company until next tax year. Going through an Umbrella Co. does not have this option.

Of course it depends on individual circumstances but I would say going Ltd is a no brainer in this case.

It's not difficult to set up a Ltd yourself, but speak to an accountant (or 3) for some initial advice anyway. They should also advise on the most tax efficient way to pay yourself and it doesn't cost anything for an initial chat.