New limited company, IT consultant, husband and wife scenario New limited company, IT consultant, husband and wife scenario
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  1. #1

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    Default New limited company, IT consultant, husband and wife scenario

    All, I would appreciate your comments regarding our plan on how to handle our salary/dividends/tax matters when it comes to the limited company that I have just founded together with my wife.

    Mr
    - He is a director of the limited company
    - He is paid a salary of £8,424/year
    - Owns 70% of shares and receives 70% of dividends (£2,000 tax free and the rest taxed at 7.5%)
    - He works for different clients, does IT consultancy, on average 6 months long contracts, on average £400/day, on average 200 days/year - total company’s income is on average £80,000/year, expenses (travel) are on average between £5,000 - £10,000/year

    Mrs
    - Works part-time, for another company, earns around £20,000-25,000 per year before taxes.
    - She does all the bookkeeping and paperwork for the limited company that we have founded
    - Not a director, owns 30% of shares and receives 30% of dividends (£2,000 tax free and the rest taxed at 7.5%)

    Mr and Mrs live under the same roof.

    None of us ever goes above £46,351 (higher tax rate).

    Would it sound OK to HMRC?

    Many thanks for all constructive feedback.
    Last edited by Franklin09; 2nd December 2018 at 08:57.

  2. #2

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    What exactly are you concerned about with this arrangement? Seems fairly reasonable to me but IMO both shareholders should be company officers in case you ever need to take advantage of entrepreneurs relief.

  3. #3

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    What does your accountant say?
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  4. #4

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    Quote Originally Posted by TheCyclingProgrammer View Post
    What exactly are you concerned about with this arrangement? Seems fairly reasonable to me but IMO both shareholders should be company officers in case you ever need to take advantage of entrepreneurs relief.
    I am concerned because I have heard from a friend that sharing dividend with a partner is "risky and could attract HMRC inspection" which then could possibly lead to an IR35 investigation. In other words, don't split your dividend and keep low profile. Pay ~35% in taxes (as opposed to ~25%) to not attract HMRC.

    Similar for my plan B, where instead of sharing dividends with my partner, I would own 100% of shares and pay everything beyond £46,351 into SIPP. Again, this would apparently be seen by HMRC as tax avoidance.
    Last edited by Franklin09; 2nd December 2018 at 09:03.

  5. #5

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    Quote Originally Posted by BR14 View Post
    What does your accountant say?
    No accountant at this point (yes, I know). I will have one soon. Just trying to figure out a high level plan and based on that find appropriate accounting services.

    I have signed my first contract very recently (starting on the 13th of December).

  6. #6

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    Quote Originally Posted by Franklin09 View Post
    No accountant at this point (yes, I know). I will have one soon. Just trying to figure out a high level plan and based on that find appropriate accounting services.

    I have signed my first contract very recently (starting on the 13th of December).
    Do you not think an accountant would be quite useful in this planning phase? They kinda know what they are doing.

    All contracting accountants offering FA are more or less thwle same so I think you are approaching this all wrong.
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    Quote Originally Posted by northernladuk View Post
    Do you not think an accountant would be quite useful in this planning phase? They kinda know what they are doing.

    All contracting accountants offering FA are more or less thwle same so I think you are approaching this all wrong.

    Sure, what you are saying makes sense.

    All I am trying to do at this point is to learn a bit about how limited companies work; enough to have the basic understanding and be able to engage in a conversation when talking to an accountant.

    I came up with a couple of options (as described above, splitting dividends between partners or pension contributions into SIPP) and just wanted few experienced people here to comment/suggest, especially in regards to how HMRC will see it.
    Last edited by Franklin09; 2nd December 2018 at 16:56.

  8. #8

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    Quote Originally Posted by Franklin09 View Post
    Sure, what you are saying makes sense.

    All I am trying to do at this point is to learn a bit about how limited companies work; enough to have a basic understanding and be able to engage in a conversation when talking to an accountant.
    Why do you need a limited company?

    The dividend tax free allowance is of minimal value these days.

    I see the advantage of a dividend for employer NIC purposes (and this is perhaps a weakness in terms of "will HMRC come chasing") but other than that, where is the benefit?

    I don't know if your clients are in the public sector or not, but from April 2020 it will make little difference. From then the end client will determine IR35 status for each contract.

    We believe that HMRC is staring to collect data from big employers about which contractors are now "outside IR35" but following the new rules, will be "inside". Paired with a very mealy mouthed "promise" not to investigate this situation historically (which many in the sector do not believe), we think that there is going to be huge pressure on end clients to put people inside IR35.

    At that point, the limited company serves no purpose.
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  9. #9

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    Quote Originally Posted by webberg View Post
    Why do you need a limited company?

    The dividend tax free allowance is of minimal value these days.

    I see the advantage of a dividend for employer NIC purposes (and this is perhaps a weakness in terms of "will HMRC come chasing") but other than that, where is the benefit?

    I don't know if your clients are in the public sector or not, but from April 2020 it will make little difference. From then the end client will determine IR35 status for each contract.

    We believe that HMRC is staring to collect data from big employers about which contractors are now "outside IR35" but following the new rules, will be "inside". Paired with a very mealy mouthed "promise" not to investigate this situation historically (which many in the sector do not believe), we think that there is going to be huge pressure on end clients to put people inside IR35.

    At that point, the limited company serves no purpose.
    I thought going with a limited company would be the most tax efficient way.

    This is in private sector. 6 months contract. £400 per day (possibly £450 after a month or two). Outside of IR35. I will not have any other income.

    I should be able to secure a new contract at a new place every 6-7 months, at a similar rate (£400 - £500 / day).

    My wife earns £20,000 - £25,000 working part-time.

    We are in late 30s.

    This is pretty much the situation; it is that simple.

    I understand that from April 2020 things will change.

    But for now (3 months in 2018/2019 and 12 months in 2019/2020), what would be another tax-efficient and HMRC-friendly option? What would you do in the situation above?

    You see, with limited company and dividend split (70%/30%), we would end up pocketing 75 - 80% after taxes.
    Last edited by Franklin09; 2nd December 2018 at 15:08.

  10. #10

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    Your plan is not in any way unusual - provided you are married and living together then there are no issues with your spouse holding shares in the company. There is a case law precedent set around this (Arctic Systems) so provided you aren't doing anything different from that then you should be fine - if you are unsure then ask your accountant about this when you appoint one.

    The ownership of the company would not be a pointer to IR35 - this is determined by the contract that you have with the agency/end-client and your working practices. I would suggest the contract be reviewed for IR35 purposes (if it hasn't already), rather than taking the word of somebody like an agent - if you get this wrong then it is you that is liable for the additional tax, not them.

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