Reply to: Permanent Job and Outside IR35 Contract (Part Time)

[Guy Incognito]

Set up a limited company, pay corporation tax and take the rests as Directors Employer Pension Contribution.

[gixxer2021]

I'm safe with the employment contract, but I'm not sure what's IP Ownership - not getting much out of google.

Intellectual Property ownership/rights e.g. https://www.legawise.com/intellectua...ment-contracts

Some employers will try and own anything you do during your employment that’s related to their work (depends how narrow that field is), so if you work another contract you may well find that they technically own the IP for the work you’re doing for the other client, which could get very messy. *Disclaimer I’m no lawyer so I’d get anything properly checked out if in doubt.

[Pete30]

No, sorry, I didn't explain that properly. You'll only pay 1 lot of tax on that £8k (i.e. dividend tax). However, the % for dividend tax varies, depending on which bracket you're in.

In this example, you're in the higher rate tax bracket. So, you'd pay 40% tax on some of your salary (c. £27k). You'd also pay 33.75% tax on some of your dividends (£8k).

The key point here is that you don't pay 8.75% (basic rate) on the first £38k of dividends, because you've already used up your basic rate band on your salary.

Similarly, if you had £65k of salary + £90k of dividends (£155k in total), you'd be paying 39.35% on the final £3k of dividends (additional rate), even though the salary and dividends are both below the £150k threshold on their own.
NB The final £3k rather than the final £5k, because the first £2k are covered by the dividend allowance.

I'm all clear now. Can't thank you enough for taking your time and effort to explain all my questions.

[hobnob]

That's bad news actually.

For example. I earn £65K in perm job - so I'm on higher rate. I scoop £10K as dividend from the limited company.

1. I'll first be paying dividend tax for £8K dividend (after £2K allowance)
2. And I will also be paying higher tax rate for the dividend as It's now £65K perm + £8 Dividend = £73K taxable salary in total.

So Ideally I would be paying two tax components for £8K (after £2K allowance). Ouch!!!!

No, sorry, I didn't explain that properly. You'll only pay 1 lot of tax on that £8k (i.e. dividend tax). However, the % for dividend tax varies, depending on which bracket you're in.

In this example, you're in the higher rate tax bracket. So, you'd pay 40% tax on some of your salary (c. £27k). You'd also pay 33.75% tax on some of your dividends (£8k).

The key point here is that you don't pay 8.75% (basic rate) on the first £38k of dividends, because you've already used up your basic rate band on your salary.

Similarly, if you had £65k of salary + £90k of dividends (£155k in total), you'd be paying 39.35% on the final £3k of dividends (additional rate), even though the salary and dividends are both below the £150k threshold on their own.
NB The final £3k rather than the final £5k, because the first £2k are covered by the dividend allowance.

[Pete30]

Intellectual Property. If you invent something as an employee - and "invent" has a fairly wide meaning, from widgets to processes - then the rights to it might well belong to your employer. Therefore if you devise a new, profitable something for your side gig, your current employer may look for a cut of your income from it, or charge the other side a fee or even say to the other side "It's ours and you can't use it".

A bit of research and some careful reading of your existing contract of employment (including all the various things that HR send out, like Computer Usage policy and the rest) is something of a necessity.

Thank you for the explanation. I'm good in this regard, I wont be inventing anything

[malvolio]

I'm safe with the employment contract, but I'm not sure what's IP Ownership - not getting much out of google.

Intellectual Property. If you invent something as an employee - and "invent" has a fairly wide meaning, from widgets to processes - then the rights to it might well belong to your employer. Therefore if you devise a new, profitable something for your side gig, your current employer may look for a cut of your income from it, or charge the other side a fee or even say to the other side "It's ours and you can't use it".

A bit of research and some careful reading of your existing contract of employment (including all the various things that HR send out, like Computer Usage policy and the rest) is something of a necessity.

[Pete30]

Apologies if this has already been mentioned, but you’d want to check your employment contract carefully for clauses around other employment, and also IP ownership. My last employment contract (many years ago) had some pretty onerous clauses around both that would have made working another side gig difficult/impossible.

I'm safe with the employment contract, but I'm not sure what's IP Ownership - not getting much out of google.

[Pete30]

Dividends aren't counted as salary, but they're both counted as income and the tax brackets are shared. Imagine having 3 empty jugs:
* Personal allowance (12.5L)
* Basic rate (37.7L)
* Higher rate (100L)

You have a barrel of water representing your salary. You pour that into the first jug until it's full up, then the second jug, then the third jug. If you still have water left in the barrel, you tip it into a big pond labelled "Additional rate".

You then have another barrel of water representing your dividends. You can scoop out 2L into a new jug (dividend allowance), but then the rest of the barrel has to go into the same jugs as before. So, if the higher rate jug is half full already, that's where you start; if you fill the jug, you'll shift to the pond, i.e. you'd pay additional rate tax on those dividends.

That's bad news actually.

For example. I earn £65K in perm job - so I'm on higher rate. I scoop £10K as dividend from the limited company.

1. I'll first be paying dividend tax for £8K dividend (after £2K allowance)
2. And I will also be paying higher tax rate for the dividend as It's now £65K perm + £8 Dividend = £73K taxable salary in total.

So Ideally I would be paying two tax components for £8K (after £2K allowance). Ouch!!!!

[gixxer2021]

Apologies if this has already been mentioned, but you’d want to check your employment contract carefully for clauses around other employment, and also IP ownership. My last employment contract (many years ago) had some pretty onerous clauses around both that would have made working another side gig difficult/impossible.

[hobnob]

I'm on higher rate bracket with permanent role. If I get all (or any) money from the ltd company as dividend, I would still be staying in same tax bracket, isn't it? - as the dividend will not be counted as salary thus pushing me to additional tax bracket?

Dividends aren't counted as salary, but they're both counted as income and the tax brackets are shared. Imagine having 3 empty jugs:
* Personal allowance (12.5L)
* Basic rate (37.7L)
* Higher rate (100L)

You have a barrel of water representing your salary. You pour that into the first jug until it's full up, then the second jug, then the third jug. If you still have water left in the barrel, you tip it into a big pond labelled "Additional rate".

You then have another barrel of water representing your dividends. You can scoop out 2L into a new jug (dividend allowance), but then the rest of the barrel has to go into the same jugs as before. So, if the higher rate jug is half full already, that's where you start; if you fill the jug, you'll shift to the pond, i.e. you'd pay additional rate tax on those dividends.

Hopefully that's a vaguely useful analogy

The extra complication is that if your total income (salary + dividends) exceeds £100k then your basic allowance will start to shrink:
Income Tax rates and Personal Allowances : Income over £100,000 - GOV.UK (www.gov.uk)
This wouldn't affect the additional rate, but it means that you'd be paying higher rate on more of your income.

I could keep the money in the company bank account, but I will have to take it out at some point and the situation would still be same?

It depends what else you're earning in that year. E.g. suppose that you lost your permie job and you were living off the contract for a while. That might put you in the basic rate tax bracket instead.

[Pete30]

Thank You. I've done the math as you mentioned and I would be paying about 45% in Corporation Tax and Dividend Tax - which is same as inside IR35.

I then have insurance, VAT reg, accountant fee etc.

You'll also need to watch out for going into the additional rate tax bracket.

I'm on higher rate bracket with permanent role. If I get all (or any) money from the ltd company as dividend, I would still be staying in same tax bracket, isn't it? - as the dividend will not be counted as salary thus pushing me to additional tax bracket?

* Will you drain the company's bank account (taking everything as salary/dividends) or leave some money in the company as a warchest?

I could keep the money in the company bank account, but I will have to take it out at some point and the situation would still be same?

* Do you need to pay for travel/accommodation or are you working from home?

This gig is wfh, so Ideally there is nothing to claim as expense except some equipments.

[hobnob]

Thanks for the explanation.

That's 60%. After counting accountant fee, insurance etc, let's say it would be 58%. And it's same as being inside IR35, but I'm opening myself to HMRC with outside option.

Glad to be of service

Just to clarify, it's 60% in this specific example. However, it would depend on what the specific figures are.

E.g. suppose that your company had £20k of profits:
* Your company would pay £3,800 in Corporation Tax (19%).
* You would get £16,200 in dividends.
* You'd pay 0% dividend tax on the first £2,000 (personal allowance), as before.
* You'd pay 33.75% dividend tax on the other £14,200 (higher rate) = £4,792.50.
* So, your "take home" money would be £11,407.50 ~= 57% of the original profit.

In other words, the more dividends you get, the lower the percentage will be, because the £2k personal allowance will be a smaller proportion of the total. You'll also need to watch out for going into the additional rate tax bracket.

Other factors to consider:
* Will you drain the company's bank account (taking everything as salary/dividends) or leave some money in the company as a warchest?
* Will you make pension contributions?
* Do you need to pay for travel/accommodation or are you working from home?

[Pete30]

Suppose that your limited company makes £10,000 of profit (after salary, accountancy fees, etc.) Your company would then pay £1,900 in corporation tax, leaving £8,100 that you can take as dividends.

You would then personally have to pay tax on those dividends, when you submit your SATR (Self-Assessment Tax Return):
* The first £2,000 would be 0% (personal allowance)
* The other £6,100 would 33.75% (higher rate) = £2058.75

So, out of the company's £10,000 profit, you would personally get £6,041.25.

Thanks for the explanation.

That's 60%. After counting accountant fee, insurance etc, let's say it would be 58%. And it's same as being inside IR35, but I'm opening myself to HMRC with outside option.

This is eye-opening conversation to me. Thanks a ton!!!!.

[hobnob]

The question is on dividend I take out from the company. I presume the dividend tax goes out from the company account and whatever lands on my personal account, wouldn't be considered as my personal income?

Suppose that your limited company makes £10,000 of profit (after salary, accountancy fees, etc.) Your company would then pay £1,900 in corporation tax, leaving £8,100 that you can take as dividends.

You would then personally have to pay tax on those dividends, when you submit your SATR (Self-Assessment Tax Return):
* The first £2,000 would be 0% (personal allowance)
* The other £6,100 would 33.75% (higher rate) = £2058.75

So, out of the company's £10,000 profit, you would personally get £6,041.25.

[northernladuk]

No, I'm thinking of not to take this outside ir35 gig. As I'm only after part time gig, I just want to keep it neat and simple.

It seems like I would anyway be ending up paying same amount of tax (if not, very close) like inside ir35. And there is no point in going through all these nightmare.

Can't argue with that. Still a fortunate position to be in either way.