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northernladuk
3rd September 2015, 10:33
Dunno if it's been mentioned before but......

A thought struck me during a conversation today. We have the timelines for when these issues are going to hit and are knee deep in discussion around it but no one knows for sure as it's in consultation phase etc etc but....

If the IR35 issue is going to hit won't that mean we will have to do some very careful tax planning to make sure extraction of existing funds in the company is done in the most efficient way possible? Won't it need a bit of work to try and second guess what will happen and possibly start a phased approach to withdrawing funds over the next year or two to make sure we don't end up paying the absolute max tax rates on withdrawing large sums of company cash?

I appreciate it's all up in the air but won't there be a point coming up quickly where people are going to have to start at least planning what to do with their company reserves pretty soon? Trying to do it all in the last tax year before D-Day might be too late for some?

Or am I being thick and we'll just carry on with the dividends as before?

ASB
3rd September 2015, 11:11
Dunno if it's been mentioned before but......

A thought struck me during a conversation today. We have the timelines for when these issues are going to hit and are knee deep in discussion around it but no one knows for sure as it's in consultation phase etc etc but....

If the IR35 issue is going to hit won't that mean we will have to do some very careful tax planning to make sure extraction of existing funds in the company is done in the most efficient way possible? Won't it need a bit of work to try and second guess what will happen and possibly start a phased approach to withdrawing funds over the next year or two to make sure we don't end up paying the absolute max tax rates on withdrawing large sums of company cash?

I appreciate it's all up in the air but won't there be a point coming up quickly where people are going to have to start at least planning what to do with their company reserves pretty soon? Trying to do it all in the last tax year before D-Day might be too late for some?

Or am I being thick and we'll just carry on with the dividends as before?

It looks to me like the 7.5% dividend tax from next year is a cert. So calculating overall liability based on current rates etc is potentially important. It may be prudent to take some hit now based on current rules to try and mitigate next year. All depends as ever on individual circumstance, but I'd be running calculations based on what is know to figure out the most cost effective way of extraction.

In terms of "you're all going to be in IR35" (which may or may not turn out to be the case in 2 years time) this exacerbates the problem in many ways.

If one is accumulating dividends and building them up then it is like one is a higher rate taxpayer otherwise.

Going forwards this implies one will be higher rate taxpayer though salary in an ir35'd world.

This then means any dividends will definitely be subject to higher rate taxes.

THere are limited avoidance measures. Plunder the accounts over the next 2 years to get as much as possible into personal hands, careful calculations obviously required due to the extra tax hit this causes.

Stuff it in a pension as a chargeable expense. Depends of course very much on the numbers individual attitude etc.

Leave it until there is a more benign tax regime (as if); this might perhaps be in retirement and reverting to a standard rate taxpayer.

Certainly anybody with fairly substantial retained profits needs, in my view, to do some careful thinking about their strategy to try and minimise.

northernladuk
3rd September 2015, 11:39
Certainly anybody with fairly substantial retained profits needs, in my view, to do some careful thinking about their strategy to try and minimise.

I thought this might be the case and not something I'd seen mentioned in all the knee jerk calculations over the past months.

Having a quick scan around companycheck I can see a few contractors I know with over 100k in the accounts. Sadly most of these people are the ones that don't know much about IR35 and don't put a lot of effort in to running their company i.e. looking for opportunities to close the company or think long term about withdrawing whatever is on the horizon. Boy are they going to get hit hard unless their accountants pick up on this theme and start advising on options soon.

WordIsBond
3rd September 2015, 11:40
There's a lot to think about here. In general, IR35 shouldn't have any impact on funds you have already earned and are sitting in your company. But if it forces you into the higher rate band, then you will probably want to limit your dividends to £5K.

There is also something to be said for just taking the hit this year and taking a big chunk of dividends, even if it means higher rate tax on dividends, since it might be even more painful to take the funds in future.

There is a risk that ER is going to be taken away, too, that appears to be the obvious next target. So just leaving funds in the company with the intent to take advantage of ER might be a mistake.

In general, pension contributions are a good thing to do with IR35 funds. You can deduct your pension contributions from your deemed payment, reducing IR35 taxes.

So if you think you are going to be inside IR35, it might be worth considering delaying pension contributions so you can carry them forward, and then pay them out of IR35 funds. Of course, they've also made noise about hitting tax relief on pensions, so there's a risk here, too. If you delay pension contributions, you run the risk of losing the chance to contribute tax-free. I actually doubt this will happen, though -- they are forcing companies to contribute via AE and now they will say they can't deduct the contribution or that employees will be stuck with a tax hit? I don't think that will fly.

Obviously, someone who is older could just use their company as a second pension. Retained funds can be paid as dividends after retirement without a particularly onerous tax hit, the first £5K being tax free and after that at whatever the basic rate dividend tax rate is at the time. But if you are younger, you might not want to wait 30 years to get your funds out.

IANAA. :D And I am also not a psychic and don't know the future and what will happen.

LondonManc
3rd September 2015, 11:50
Another option could be to hedge against the worst and keep the warchest there rather than in a savings account. I can't see interest rates going over 1% for the next decade so may as well leave it in the company account unless you fancy taking a punt of stock market, premium bonds, etc.

ASB
3rd September 2015, 13:36
There's a lot to think about here. In general, IR35 shouldn't have any impact on funds you have already earned and are sitting in your company. But if it forces you into the higher rate band, then you will probably want to limit your dividends to £5K.

That's true, but it kind of has a different impact, and it is probably a bit tricky to plan around.

Assume at the moment that you bill 100k - it's a nice round number - and only take dividends and salary of 43k (about where the jump is).

On this basis you will retain something like (all number totally off the top of my head): 100k - 10k salary = 90k - 18k CT = 72k - 33k dividends = 39k retained.

So, between now and 2017 you are likely to retain an additional 80k ish. At this point the world is IR35 caught because of the changes. So, you are straight onto a 95k salary (inc er Ni). This would yield 56k. (So 26k worse off overall in terms of net potential income though since actual own net income is still ahead that might be some limited solace).

The problem is that any iof the retained funds being taken as dividend are going to hit you for at least 25% since you are higher rate. Then of course there is the additional new divdend tax, and then there is the risk of starting to get into the higher rate band at 150k is taking a big chunk for any reason.

In that respect it does have impact on funds already retained.

I am no longer contracting, so the point is moot. But like (I suspect) a lot of people I had a tendency to take salary to personal allowances and dividends up to 40% threshold. And also my ex wife dividends too worked out about the same.

In this sort of scenario it seems to me that raiding now - at least up to the 45% band - is quite likely sensible - if you believe that all will be caught by IR35 in 2017.

jamesbrown
3rd September 2015, 13:55
In this sort of scenario it seems to me that raiding now - at least up to the 45% band - is quite likely sensible - if you believe that all will be caught by IR35 in 2017.

You need to factor in the tapering of the personal allowance too. Personally, I won't be changing my strategy at all, just taking what I need. It also depends whether you think ER will be around when you eventually liquidate. By all means, speak to your accountant early next year, but it's easy to overthink this, given the manifest uncertainties.

Maslins
3rd September 2015, 14:18
I thought this might be the case and not something I'd seen mentioned in all the knee jerk calculations over the past months.

Having a quick scan around companycheck I can see a few contractors I know with over 100k in the accounts. Sadly most of these people are the ones that don't know much about IR35 and don't put a lot of effort in to running their company i.e. looking for opportunities to close the company or think long term about withdrawing whatever is on the horizon. Boy are they going to get hit hard unless their accountants pick up on this theme and start advising on options soon.

Quite a lot of contractors really aren't that bothered about the level of tax they pay. They earn well, they don't concern themselves too much in exactly how much to take to stay under a certain threshold. They pay the tax based on what they did, not caring that if they'd done things slightly differently they could've saved a hundred quid. Many of these people will take any tax increases on the chin, if they even notice.

Maslins
3rd September 2015, 14:20
There is a risk that ER is going to be taken away, too, that appears to be the obvious next target. So just leaving funds in the company with the intent to take advantage of ER might be a mistake.

Indeed. Certainly some people suggesting that MVLs will have a bumper year with people who might've been considering getting out for a while deciding the new divi tax is a reason to do it now.

Very aware that this is a mixed blessing for MVL Online, as realistically it'll possibly be a short term boost before the chancellor kills that "loophole".

MrContractor85
3rd September 2015, 16:30
I'm one of those contractors with a decent amount built up (approx. 120k) but as I'm mid-contract (6 monthly, rolling, renewal already looks likely) taking me past April next year, any potential solution could fall foul of transaction in securities legislation, phoenixing, etc.

I could liquidate my limited company, but presumably I'd then have to knock the contracting on the head for a bit "leaving" a well-paid and reliable contract (go perm? take a break?) First solution is the unknown i.e. may not find a job, may not be the right role, process may take 3/4 months etc., second solution = me losing money, and then trying to get back into the market after an enforced break which isn't always that easy...

This really is a minefield. Thanks Osbourne