Freelance Limited Company (FLC) offering from IPSE

[WordIsBond]

LLPs do not use dividends so new 7.5% tax on dividends does not impact them.
craig1 wrote
http://forums.contractoruk.com/accou...ml#post1618977

So I expect it might be tax efficient on the same degree as Ltd with that new dividend tax.

Using next year's thresholds:

As I understand it, LLP partners pay tax like the self-employed. NI (Class 4) on your profits is 9% from £8060 to £42385, 2% above that. Income tax is based on normal bands -- 20% from £11,000 to £43,000, 40% above that.

For a Ltd Co, I'll assume salary next year will be £8060 to avoid NI. So corporation tax will kick in at £8060. (You could take salary at £11K, but the withdrawal of the employment allowance means it is slightly less efficient to do so.)

From £8060 to £11K, the LLP has 9% NI and no income tax, while the Ltd Co has 20% CT and no income tax or NI. If you earn between £8-11K, the LLP is better, at £11K you are £323.40 ahead with the LLP.

From £11K to £16K, the LLP has 20% income tax and 9% NI, while the Ltd Co has 20% CT and no other tax. By the time you get to £16K, the Ltd Co is more efficient. In this range, you are £450 better with the Ltd Co, so net at £16K, Ltd Co is £127.60 better.

From £16-43K, LLP continues to be taxed at 29% of gross (pre-tax) profit, 20% income tax plus 9% NI. Ltd Co is taxed at 26% of gross (pre-tax) profit, 20% CT plus 7.5% of after-CT profit. So for this band of income, the Ltd Co is 3% better, for a total benefit of £810 in this band, £937.60 cumulatively.

Above £43K, LLP is taxed at 42% -- 2% NI plus 40% income tax. Ltd Co is taxed at 20% CT plus 26% dividend tax (32.5% of after-CT profits). So from here on, the LLP is 4% better (42% vs 46%). The break-even point is £66,440, after that you are ahead with an LLP.

I can't guarantee those numbers are exactly correct.

That's not the whole story, though. With an LLP, profit is taxable to you the year in which it occurs, whether you take it out of the company or not. So you don't have the option of timing withdrawals from the company to reduce tax liabilities. If you have a very good year followed by a very bad year, you get hammered in the good year with the LLP. With a Ltd Co, you defer some of your dividends in the very good year, and pay them out in a bad year or retain them until the company closes. This can affect how much higher rate tax you pay but also things like child benefit.

With a Ltd Co, you can give shares to a low earning or non-earning spouse, not an option with an LLP.

I don't know how the reporting / accounting burden compares between Ltd Co and LLP. I suspect it is comparable.

The dividend tax certainly reduced the difference between Ltd and LLP, but I suspect the flexibility of when to take dividends is still going to tip the balance in favour of Ltd for most one man bands. And for married people who want to gift shares to their spouses, it isn't even close.

[FK1]

With a Ltd Co, you can give shares to a low earning or non-earning spouse, not an option with an LLP.
...
The dividend tax certainly reduced the difference between Ltd and LLP, but I suspect the flexibility of when to take dividends is still going to tip the balance in favour of Ltd for most one man bands. And for married people who want to gift shares to their spouses, it isn't even close.

I think the best salary is not one without NIC (£10,600) but a figure where total deduction close to 7.5%. I might be £12,000.00 with total deduction 6%.

I guess it is not a good idea to give shares to spouse or gift them unless it is done initially on the incorporation.

As far as I understand LLP it allows to distribute a profit much more flexible than LTD.
With LTD you stick with 50/50, 60/40, 70/30 forever as HRMC does not like if you would change that distribution while with LLP it is not a problem (probably)

Yes, you could not accumulate funds as with LTD but for many people it is rather a pain to have a lot of money outside their personal pocket.

[WordIsBond]

I think the best salary is not one without NIC (£10,600) but a figure where total deduction close to 7.5%. I might be £12,000.00 with total deduction 6%.

Best talk to your accountant on this. I don't know what your 6% / 7.5% is talking about.

I don't see any scenario where a salary of £12K is the most tax efficient. It is a close call this year whether the best is £8060 (the point at which you start paying NI) or £10600 (where income tax starts), but it isn't £12K.

Let's talk about just one narrow band of income, from £11K to £12K. If it is paid in salary, you pay 20% income tax and 12% employee NI. If it is not paid in salary, it is profit, and so increases your corporation tax (20%) but you have no employee NI. So if it is salary, you pay an extra 12% compared to a salary of £11K. Next year, it will be even worse as you don't get employment allowance, so you will also have to pay £13.8% employers NI. This year, assuming you get the employment allowance on employer's NI, you are costing yourself £12 for every £100 you pay yourself in salary above the personal allowance (£11,600). Next year, you'll be costing yourself around £25 for every £100.

The only case in which I could see it being different is if you have another self-employment (not a Ltd Co, but legally self-employed) in which you are taking losses which you can set off against your income. Then, it might make sense to increase your salary to take full advantage of your self-employment losses (and reduce your corporation tax in the process). Even then, you'd have NI to consider. But that's complicated, and even then you'd have NI taxes, which makes it doubtful whether that is most efficient.

You certainly shouldn't be taking salary at a higher level than the personal allowance without direct advice from a qualified accountant giving the reason why.

[FK1]

Best talk to your accountant on this. I don't know what your 6% / 7.5% is talking about.

I don't see any scenario where a salary of £12K is the most tax efficient. It is a close call this year whether the best is £8060 (the point at which you start paying NI) or £10600 (where income tax starts), but it isn't £12K.

Let's talk about just one narrow band of income, from £11K to £12K. If it is paid in salary, you pay 20% income tax and 12% employee NI. If it is not paid in salary, it is profit, and so increases your corporation tax (20%) but you have no employee NI. So if it is salary, you pay an extra 12% compared to a salary of £11K. Next year, it will be even worse as you don't get employment allowance, so you will also have to pay £13.8% employers NI. This year, assuming you get the employment allowance on employer's NI, you are costing yourself £12 for every £100 you pay yourself in salary above the personal allowance (£11,600). Next year, you'll be costing yourself around £25 for every £100.

The only case in which I could see it being different is if you have another self-employment (not a Ltd Co, but legally self-employed) in which you are taking losses which you can set off against your income. Then, it might make sense to increase your salary to take full advantage of your self-employment losses (and reduce your corporation tax in the process). Even then, you'd have NI to consider. But that's complicated, and even then you'd have NI taxes, which makes it doubtful whether that is most efficient.

You certainly shouldn't be taking salary at a higher level than the personal allowance without direct advice from a qualified accountant giving the reason why.

I wonder how much contractors share their companies with their family partners as
FLC proposal does not suite them at all as FLC applies only for solely owned Ltd.

You are right about the tax efficient salary as I mess up with 7.5% on dividends which applies from April 2016 and therefore a new factor for 2016/2017 and also I did not count Employers NI to the total percentage.

I use ListenToTaxman Salary Calculator 2015 / 2016 UK Tax and there is a Total Deductions that confused me. It is not Total enough as Employers NI should be added to that Total.

Simplified case 1. £40,000.00;
salary £ 8,060;
taxes on salary £0;
CT £6,388; ((£40,000.00 - £ 8,060)*0.2)
Total tax on £40K: 15.97%; (£6,388 + £0 + £0);

Simplified case 2. £40,000.00;
salary £10,600;
taxes on salary (£304.80 + £343.34);
CT £5,750; ((£40,000.00 - £10,600 - £304.80 - £343.34)*0.2)
Total tax on £40K: 16%; (£5,750 + £304.80 + £343.34);

Simplified case 3. £40,000.00;
salary £12,000;
taxes on salary (£752.80 + £536.54);
CT £5,342; ((£40,000.00 - £12,000 - £752.80 - £536.54)*0.2)
Total tax on £40K : 16,58%; (£5,342 + £752.80 + £536.54)

However from April 2016 the new 7.5% tax is also a factor. So I guess some salary around £11,000 will be not such stupid.

[eek]

I wonder how much contractors share their companies with their family partners as
FLC proposal does not suite them at all as FLC applies only for solely owned Ltd.

Covered that in my first post on the first page..

http://forums.contractoruk.com/accou...ml#post2131595

Worth emphasising it again. The biggest thing PCG / IPSE ever successfully did has been written off without a thought.

[malvolio]

Covered that in my first post on the first page..

http://forums.contractoruk.com/accou...ml#post2131595

Worth emphasising it again. The biggest thing PCG / IPSE ever successfully did has been written off without a thought.

No it hasn't. All you have to do is stay with a Ltd Co and split your income as normal. That may then cost you more, of course, given the way dividends and probably base taxation rates are going to change, not to mention being forcibly moved back into IR35, but hey...

[eek]

No it hasn't. All you have to do is stay with a Ltd Co and split your income as normal. That may then cost you more, of course, given the way dividends and probably base taxation rates are going to change, not to mention being forcibly moved back into IR35, but hey...

You forget that I do not believe that were an FLC to ever appear (and I don't believe it ever will) that it will be any more optional than the opt-in to agency regulations.... Where agencies use every trick possible to ensure you opt-out....

You can repeat your claim that the FLC is optional from now until hell freezes over, many on here are rather more cynical than you and know from agency regulations that were an FLC to make live easier for either the end-client or an agency most people will a singular choice:-

Move to an FLC and be put forward for the role / contract or not be put forward and continue searching....

In fact to be clear this is what will happen:-

Agency will advertise contract.

First 3 FLC candidates are put forward, anyone using a limited company instantly rejected.

Eventually those people still using a limited company will have to move to an FLC for an agency to put them forward for any role....

[FK1]

Yes, after reading IPSE proposal for FLC I got an overall impression that it is for benefiting clients and agents but not contractors themslaves.

But I believe the most passionate and best professionals will simply go direct to clients. I am writing my business plan right now and I removed all agents from LinkedIn

[eek]

Yes, after reading IPSE proposal for FLC I got an overall impression that it is for benefiting clients and agents but not contractors themslaves.

But I believe the most passionate and best professionals will simply go direct to clients. I am writing my business plan right now and I removed all agents from LinkedIn

How does removing the agent fix the problem????

It may solve the expenses bit, it doesn't solve the IR35 bit.....

[mudskipper]

No it hasn't. All you have to do is stay with a Ltd Co and split your income as normal. That may then cost you more, of course, given the way dividends and probably base taxation rates are going to change, not to mention being forcibly moved back into IR35, but hey...

Personally speaking, I don't want to operate inside IR35. If divvy tax is increased to make the difference negligible, then, whilst I won't exactly be dancing with joy, so be it - as long as it applies to all businesses. I can still then choose to leave profit in the company, max out pension etc. Those for whom it is relevant can still use spouse's tax allowances as appropriate. If I'm forced inside IR35, I'll simply work a lot less. I don't think the FLC proposal was ever that it would be more favourable than operating outside IR35 - why would HMRC ever go for that?