newbie tax question

[acitizen]

I have had a look through an awful lot of ads offering to avoid tax on contracting income. My question is basically to what extent is it worth bothering, seeing as the vast majority of the advertisers are at best keen on being misleading and at worst outright lying (retain 90% of your pre-tax income, my bum).

So, am I right in thinking that NI is the only difference if I am the only person involved? Let me take an example. Suppose I am paid 100k a year after expenses. Then I can either:

Option 1: Pay everything to self as dividends. This will incur just income tax as the 20% corporate tax will be offset as a tax credit. I will still need to pay myself the minimum wage, so another £612 or so will go on C1 NI. (?)

Option 2: Put it in the self-employment pages on the tax return. The income tax liability will remain the same, but now there is more NI to pay. This is £130 for Class 2, £3172 for C4 in the band between approx 7k and 42k, and finally £1150 for C4 NI on the profit above that. So £4452 extra overall (?)

Is the maximum possible difference between the options £4452-£612=£3839, and realistically about £2000 after paying the accountants and other costs?

I don't see that 2k a year net is worth worrying about the HMRC wanting to get medieval on me? But then, just why would there be a massive industry making bizarre claims if there is no point? I suppose there is some value to having a C1 contribution record, though I am too wealthy to ever claim non-trivial benefits (however, I suppose the state pension may still exist when I retire). That is unlikely to be the reason since it's not mentioned in the annoying ads.

I would be very grateful for comments, and in particular for links to relevant information (rather than to somewhere trying to sell me a scheme of dubious legality, and then under false pretenses). Many thanks in advance.

[SueEllen]

I have had a look through an awful lot of ads offering to avoid tax on contracting income. My question is basically to what extent is it worth bothering, seeing as the vast majority of the advertisers are at best keen on being misleading and at worst outright lying (retain 90% of your pre-tax income, my bum).

Read the BN66 thread and the Loans from EBTs and other Trusts thread. They are stickies on the board.

You can also search for "BN66" to read the older longer threads which are not stickies.

You will probably get one or two employees from people who offer new schemes jumping in this thread as well, but I advise you to read the threads I've mentioned.

The simplest ways of not having sleepless nights is to pay your tax in the UK if you are a resident here and work here.

Likewise if you end up working in another European country follow their tax rules and don't presume what works in the UK works there without researching it yourself. Some countries do have tax pages in English.

[Kanye]

Option 1: Pay everything to self as dividends. This will incur just income tax as the 20% corporate tax will be offset as a tax credit. I will still need to pay myself the minimum wage, so another £612 or so will go on C1 NI. (?)

That's not right. You'll pay 20% corporation tax plus 20%+ personal tax on the 80k divis.

So it's 40%+ tax if you go that route....

[acitizen]

That's not right. You'll pay 20% corporation tax plus 20%+ personal tax on the 80k divis.

So it's 40%+ tax if you go that route....

Only on dividends over the HR threshold, and it is exactly 40% in total since the income is only 100k. Anyway, the important point was that this part of the tax liability was the same whichever way I sliced it for the HMRC, so does not matter when deciding which route to take (?)

[ASB]

As a director you do not have to pay NMW. Also employers national insurance seems to have been omitted.

You are correct though, the main difference between salary and dividends in the effective taxation rates is nil. It's both lots of NI that hurts from a salary point of view.

[geoff from contracta IOM]

I have had a look through an awful lot of ads offering to avoid tax on contracting income. My question is basically to what extent is it worth bothering, seeing as the vast majority of the advertisers are at best keen on being misleading and at worst outright lying (retain 90% of your pre-tax income, my bum).

So, am I right in thinking that NI is the only difference if I am the only person involved? Let me take an example. Suppose I am paid 100k a year after expenses. Then I can either:

Option 1: Pay everything to self as dividends. This will incur just income tax as the 20% corporate tax will be offset as a tax credit. I will still need to pay myself the minimum wage, so another £612 or so will go on C1 NI. (?)

Option 2: Put it in the self-employment pages on the tax return. The income tax liability will remain the same, but now there is more NI to pay. This is £130 for Class 2, £3172 for C4 in the band between approx 7k and 42k, and finally £1150 for C4 NI on the profit above that. So £4452 extra overall (?)

Is the maximum possible difference between the options £4452-£612=£3839, and realistically about £2000 after paying the accountants and other costs?

I don't see that 2k a year net is worth worrying about the HMRC wanting to get medieval on me? But then, just why would there be a massive industry making bizarre claims if there is no point? I suppose there is some value to having a C1 contribution record, though I am too wealthy to ever claim non-trivial benefits (however, I suppose the state pension may still exist when I retire). That is unlikely to be the reason since it's not mentioned in the annoying ads.

I would be very grateful for comments, and in particular for links to relevant information (rather than to somewhere trying to sell me a scheme of dubious legality, and then under false pretenses). Many thanks in advance.

The difference between my scheme and using a Ltd Co. is usually about 15 - 20% of contract value, if you are in the position to make generous contributions to your pension through your Ltd. Co. then you can probably achieve approaching this percentage retention in this way. The attraction is that you get access to funds now ( don't have to wait for pension ) you also avoid any IR35 issues, on the other side the majority of schemes are structured based on legal opinion, granted opinion of some very clever and respected people but the only way to be realitively certain is if it has been tested in court. It is now fairly widely accepted in the Tax mitigation industy that self employed benefit trust schemes work but if you want a higher degree of certainty ( but have IR35 as a concern ) Ltd is probably the option for you. I have said on this forum numerous times it depends on your risk profile and if you do decide on a scheme provider make sure you know thier background, I have seen lots of new providers pop up recently and if they can pop up they can also pop down. If you are seriously considering a scheme find one that has been audited by a chartered tax adviser or accountant who know the field there are some documents such as the legal opinion that you cannot see personally but we personally have given some professionals access to all the relevant information subject to some tight controls and they can then prepare a report for clients based on what they have seen, I think it costs about 150 pounds for the report but would definitely be money well spent if it keeps you out of trouble further down the line.

HTH

[geoff from contracta IOM]

Read the BN66 thread and the Loans from EBTs and other Trusts thread. They are stickies on the board.

You can also search for "BN66" to read the older longer threads which are not stickies.

You will probably get one or two employees from people who offer new schemes jumping in this thread as well, but I advise you to read the threads I've mentioned.

The simplest ways of not having sleepless nights is to pay your tax in the UK if you are a resident here and work here.

Likewise if you end up working in another European country follow their tax rules and don't presume what works in the UK works there without researching it yourself. Some countries do have tax pages in English.

SE BN66 has very little to do with SEBT type schemes other than the issue of retrospection which if it wasn't used for EBT's why SEBT's ?

[malvolio]

SE BN66 has very little to do with SEBT type schemes other than the issue of retrospection which if it wasn't used for EBT's why SEBT's ?

Actually the whole industry looks likely to go pop very soon, as HMT are looking at ways to attack disguised remuneration on all fronts. Basically they are taking the line that if your money ends up in your pocket, you will be paying UK taxes on it. EBTs will survive snice they are fully legal and effective for things like pension funds and deferred share schemes, but for day-to-day income they are under serious threat.

And don't expect the SEBTs to last too long either anyway. They survive courtesy of a minor glitch in the current legislation that can easily be closed.

One article on this is on Login to AccountingWEB | AccountingWEB (may require registration, but it's free)

[Vallah]

Actually the whole industry looks likely to go pop very soon

Thanks for the advance warning.

[geoff from contracta IOM]

Actually the whole industry looks likely to go pop very soon, as HMT are looking at ways to attack disguised remuneration on all fronts. Basically they are taking the line that if your money ends up in your pocket, you will be paying UK taxes on it. EBTs will survive snice they are fully legal and effective for things like pension funds and deferred share schemes, but for day-to-day income they are under serious threat.

And don't expect the SEBTs to last too long either anyway. They survive courtesy of a minor glitch in the current legislation that can easily be closed.

One article on this is on Login to AccountingWEB | AccountingWEB (may require registration, but it's free)

I would have to say Mal if any provider claims that they know how long it will be until the gap is closed they are either a fortune teller or fibbing, I think we would all be aware that the issue will be dealt with we just don't know when but until the law is changed it is still a viable option, subject to the usual cautions.