Reply to: If you're a contractor and pay yourself a salary then you'll get taxed 65.8%

[TheFaQQer]

Speaking with HMRC I have been told that what they expect is someone to take a salary appropriate to the role they are fulfilling, with dividends being taken out of what remains i.e. company profit.

The amount of work I do on an average day, £7k salary is too much.

[moggy]

I hope the poster owns the company, as if not they they may well be out of a job, once they have finished the website of course...

[IR35 Avoider]

For comparison with what you could pay out by other means, the percentage needs to be of "cost to employer" (i.e. salary + employer NI) rather than just salary. So it's (40% + 2% + 13.8%) / (100% + 13.8%) = 49%.

In comparison £100 of company profit would become £80 after corporation tax, pay dividend of £80, with tax credit that's £80/90% = £88.88, higher rate tax of 32.5% * £88.88 = £28.88 leaves you with £88.88 - £28.88 = £60, so 40% tax.

A pension contribution will ultimately be taxed at 0%, 15%, or 30%, on average, depending on whether at the time it is taken the income falls in the personal allowance, basic rate or higher rate bands. (25% tax-free lump sum, so for basic rate tax is 20% * 75% = 15%, for higher rate tax = 40% * 75% = 30%.)

[titan]

I'm politely wandering if you had a liquid lunch before posting? Or maybe I did, since I'm the only one who appears to see a problem with this.

The 40% tax band starts at £32,010 of taxable income, in other words, given the personal allowance of £9,440 it starts at £32,010 + £9,440 = £41,450 of income.

12% employee NI on earnings above £7,755 up to £41,450, after which it drops to 2%. So you do not pay 12% employee NI and 40% tax on any chunk of income.

I was thinking exactly the same and was confused only because nobody else seems to have realized this. I too think the max you pay iss 55.8% (40 + 2 + 13.8). Still, not saying in any way that this is not a significant chunk to be parting with!

[BlasterBates]

Speaking with HMRC I have been told that what they expect is someone to take a salary appropriate to the role they are fulfilling, with dividends being taken out of what remains i.e. company profit.

Now I have no idea if that is true or not and whether or not that knocks you off their target list. However, I am pretty sure it reduces risk, which is good enough for me.

Absolutely, under those circumstances they´ll have the feeling the tax take is reasonable and then they go after the minimum wagers.

I don´t quite follow the logic that an HMRC officials treat all the contractors the same. It´s obvious they´ll focus on the ones avoiding the most, because that´s where they have the most to gain, given they can´t investigate everyone.

[IR35 Avoider]

Slightly over-dramatic but in 13/14 if you pay yourself a salary through your own Ltd company then the income between £32,010 and £41,450 will be hit by 65.8% "tax": 40% income tax + 12% Employee NI + 13.8% Employer NI.

I'm politely wandering if you had a liquid lunch before posting? Or maybe I did, since I'm the only one who appears to see a problem with this.

The 40% tax band starts at £32,010 of taxable income, in other words, given the personal allowance of £9,440 it starts at £32,010 + £9,440 = £41,450 of income.

12% employee NI on earnings above £7,755 up to £41,450, after which it drops to 2%. So you do not pay 12% employee NI and 40% tax on any chunk of income.

[Dallas]

About as impressive of his tax knowledge IMO.

Details

form done by bobs?

[northernladuk]

Is this your site? Impressive.

About as impressive of his tax knowledge IMO.

[mudskipper]

Sorry folks. Got my tax years mixed up. Updated the original post. And yes, actually setting the salary exactly equal to the primary threshold was just hypothetical. I should have been clearer about that.

Is this your site? Impressive.

[Moscow Mule]

...what they expect is someone to take a salary appropriate to the role they are fulfilling...

I think our bobs cost something like £10k a year...

[GB9]

I would imagine that only those caught by IR35 would pay themselves such a high salary anyway

Speaking with HMRC I have been told that what they expect is someone to take a salary appropriate to the role they are fulfilling, with dividends being taken out of what remains i.e. company profit.

Now I have no idea if that is true or not and whether or not that knocks you off their target list. However, I am pretty sure it reduces risk, which is good enough for me.

[jamesbrown]

You should only worry about being investigated if you have something to hide!

If you ask for, receive and follow good professional advice then any HMRC enquiry should be fine, with nothing to worry about.

Absolutely, although from what I gather, the process itself can be a PITA, so given the choice.... But you're absolute correct, and IR35 is such a non-issue in that respect - get new work, complete the due diligence, join PCG+ and then forget about it.

[Nixon Williams]

You should only worry about being investigated if you have something to hide!

If you ask for, receive and follow good professional advice then any HMRC enquiry should be fine, with nothing to worry about.

[jamesbrown]

According to Bob Jones an ex-Inland Revenue tax inspector, paying yourself a minimum salary does make you a prime target.

What triggers an IR35 investigation? :: Contractor UK

Yeah, but I think that's a given, and covers the vast majority of contractors. Arguing about the precise level of that minimum salary is a non-issue IMHO. Anyone who thinks that paying themselves a minimum wage of 12k and paying some NI will reduce the risk of them being targeted is probably mistaken.

[BlasterBates]

According to Bob Jones an ex-Inland Revenue tax inspector, paying yourself a minimum salary does make you a prime target.

What triggers an IR35 investigation? :: Contractor UK

Such was the warning yesterday from Bob Jones, an ex-Inland Revenue tax inspector, who outlined the typical appearance of a taxpayer the agency's IR35 inspectors might approach.

"Someone operating through a limited company who has relatively low turnover; is the sole director; has minimal expenses; pays [themselves] the minimum wage but has large dividends."