Contractors’ Questions: Should my limited company act before April?

Contractor’s Question: Are limited company contractors like their independent business counterparts operating as sole traders, in that they too must make end of tax year considerations? Unlike such unincorporated business, I’m potentially liable under IR35, but compensate for this risk by taking the tax advantages permitted to limited company directors through paying myself through the low salary-dividend mix.

Expert’s Answer: The final days of the tax year ending on April 5th 2012 are indeed fast approaching so, yes, now is a good time to review your position as a limited company contractor business.

Set the right wage levels

In particular, now is the time to set your wages for the forthcoming tax year - 2012/2013. Typically, contractors (and their other employees) adopt wages between the maximum level that still avoids incurring any PAYE or National Insurance (NI) deductions and the National Minimum Wage.

How to duck NI

For 2012/ 2013 wages, between £442 and £589 per month suffer no employee or employer NI liabilities, but you will still qualify for state benefits, such as a state pension.

Normally at this level no Income Tax is deducted as PAYE, because the salary falls within the normal personal allowance. But watch out where any self-assessment underpayment is being collected through your tax code, as this can easily eat into the level of your allowances.

If you’re IR35-caught…

In the event that IR35 is an issue, IR35 tax liabilities for 2011/2012 are payable in April 2012 – that’s next month! You therefore don’t have much time to decide and calculate the additional deemed salary to be reported at the end of the tax year. To help inform your decision, you should consider every contract that existed during the tax year and consider whether or not you have any exposure to the deemed salary provisions.  Fresh guidance on IR35 is scheduled to be handed down by HMRC on April 6th 2012, when the new system for IR35’s administration goes live.

But if you have no IR35 issues, then you will most likely be taking a low salary and dividends, as you indicate.

Contractor dividends and tax planning

Now is the right time to look at your total income, from all sources, and consider whether you can take additional dividends before April 6th 2012 that will fall within your basic rate tax band. Remember that when working out the maximum dividend, while avoiding higher rate taxes, you must gross up the net dividend received; gross up net dividends by dividing them by 0.9.

Even if you don’t need the money, you will have extracted maximum funds and long term minimised the tax you have to pay. Bonuses can also be considered, but you must remember the additional NI cost associated with salary versus dividends.

Apply the same test to all shareholders in the company and then consider if you need separate classes of share so you can easily vary individual shareholders dividends.

Big picture = Best picture

Lastly, although saving tax is important, there are other factors you should always consider before taking action. For example, always try to look at tax planning in the overall context of your general financial planning. Make sure you have enough money to meet your personal and business needs.

In closing, please be aware that specific account of your individual circumstances should be taken by you consulting a professional tax advisor before any of the guidance herein is acted upon.

The expert was Paul Gough, managing director of InTouch Contractor Accounting, a specialist accountant for contractors and freelance workers.

 

Tuesday 13th March 2012