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nibor
2nd September 2015, 21:35
Given change in Dividend Tax does this not become more tax efficient?

Anyone seen the calcs for it? I assume if income just over the 100k going to be worse as lose personal allowance, but somewhere over 150k going to be better as marginal rate is 47% rather than the 50.5% with ltd company (20% corp tax then 38.1% on the amount paid as div).

Although does look like someone did maths so that once Corp Tax down to 18% both very similar.

northernladuk
3rd September 2015, 06:50
HMRC have already clamped down on LLP's from 6th April 2014 and you are still at risk of IR35 as well so a double whammy. The fact no one has mentioned this with everything going on also speaks volumes. If it was that obvious it would be all over the boards by now.

I am sure there are a ton of reasons not to go LLP but for a £1800(ish) hit I can't believe changing the structure of your offering is going to help anyway.

Disguised Employees in the Midst - Contractor Weekly (http://www.contractorweekly.com/contractor-news/tax-a-ir35-news/717-disguised-employees-in-the-midst)

WordIsBond
3rd September 2015, 06:54
It was brought up on a prior thread. I discussed it at some length in a comment (http://forums.contractoruk.com/future-contracting/108354-freelance-limited-company-flc-offering-ipse-32.html#post2134240)there, but since it was rather off-topic on that thread, I'll just paste it all in here. You can go look it up, there were a few posts before it that discussed it somewhat.

I am not an accountant, so my answers may not be entirely accurate, but I don't think what I've given is a million miles away from the right answer. Perhaps one of the accountants who comment here can supplement / correct my answer.

---

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.

Maslins
3rd September 2015, 08:13
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.

This is key IMHO. I'm sure lots of contractors have Ltd Cos earning enough that they could take £50k+ in dividends, but they stick to ~£30k so that with their salary they stay in basic rate. You simply can't do that with an LLP.

Plus LLPs need to have two partners. If you've got a spouse/similar perhaps not a big deal...but if you don't, could be awkward trying to find someone/something to be the second partner. It can potentially be a Ltd Co, indeed it was a popular "tax planning/avoidance/whatever" thing for a while where the trading entity would be an LLP with Joe Bloggs as one partner and Joe Bloggs Ltd (wholly owned by Joe Bloggs) as the other partner. HMRC largely squished the benefits of that a couple of years ago...plus you still have the hassle of two separate legal entities to do accounts/tax for.

gables
4th September 2015, 08:22
This is key IMHO. I'm sure lots of contractors have Ltd Cos earning enough that they could take £50k+ in dividends, but they stick to ~£30k so that with their salary they stay in basic rate. You simply can't do that with an LLP.

Plus LLPs need to have two partners. If you've got a spouse/similar perhaps not a big deal...but if you don't, could be awkward trying to find someone/something to be the second partner. It can potentially be a Ltd Co, indeed it was a popular "tax planning/avoidance/whatever" thing for a while where the trading entity would be an LLP with Joe Bloggs as one partner and Joe Bloggs Ltd (wholly owned by Joe Bloggs) as the other partner. HMRC largely squished the benefits of that a couple of years ago...plus you still have the hassle of two separate legal entities to do accounts/tax for.

As we are not able to contract as 'sole traders' due to legislation I believe but I'm not certain, how about a structure with limited liability but taxed like a sole trader? Or is that just plain stupid?