Newbie - how much should I pay myself after redundancy payout

[Derben]

Hi,

I'm a newbie who's considering going contracting with a LTD Co. or using an Umbrella (for ease).

I have recently been made redundant which has instantly taken me over the 40% tax threshold (first time ever - always been just under).

If I go the LTD route, what is the most tax efficient way to pay myself (if at all - maybe just leave the money in the company?). How much should I pay myself bearing in mind I'm now in the higher tax bracket. I also want to ensure I'm paying NI contributions to keep my pension topped up - so I assume I will have to pay myself something to enable this.

Thanks for your advice.

[malvolio]

Hi,

I'm a newbie who's considering going contracting with a LTD Co. or using an Umbrella (for ease).

I have recently been made redundant which has instantly taken me over the 40% tax threshold (first time ever - always been just under).

If I go the LTD route, what is the most tax efficient way to pay myself (if at all - maybe just leave the money in the company?). How much should I pay myself bearing in mind I'm now in the higher tax bracket. I also want to ensure I'm paying NI contributions to keep my pension topped up - so I assume I will have to pay myself something to enable this.

Thanks for your advice.

I thought redundancy payments were tax free.... Anyway, the Freelancing Guides beckon...

There is no easy answer to your question though. It depends on what your actual tax position is for the year; if you're already into 40% territory, you may as well take it as dividends, or leave it as retained profit for when you dont' have a contract (which is likely to be a lot of the time these days). Next tax year it will be a different calculation. And so on...

Plus if you go umbrella you don't get the option; you're an employee and paid as one.

See what I mean. Do not make decisions on partial understanding. Must try harder. HTH

[Andrew at Boox]

Under £30k is tax free

See http://www.hmrc.gov.uk/guidance/redu...-factsheet.pdf

Anything under £30k is tax free when it comes to your self assessment.

Going Ltd is a good option. It keeps you flexible so you can move between agencies or projects easily. Plus, as malvolia says, you can defer taking money out of the company until it's more favourable for you.

[Clare@InTouch]

As Mal says, an Umbrella will result in you being paid as an employee, so there's option regarding tax efficiency.

You could set up a limited company and leave all profits within the company until next year, that way you won't have any further income personally this year. You only need 30 years to qualify for a state pension, so that may not be an issue.

Re the redundancy - £30k can be tax free, but I believe it depends on the total payout and whether or not it was a contractual obligation (or maybe the payout was above the £30k limit, thus the extra was taxed).

[Contreras]

How much should I pay myself bearing in mind I'm now in the higher tax bracket. I also want to ensure I'm paying NI contributions to keep my pension topped up - so I assume I will have to pay myself something to enable this.

If you have received at least £5564 (gross) salary from your permie employment since April then you already have your NI stamp for this year.

Any further dividends or salary paid this year would be taxed at the higher rate. If you work the contract through your own Ltd Co. then it's possible to retain any income within the company until next tax year. Going through an Umbrella Co. does not have this option.

Of course it depends on individual circumstances but I would say going Ltd is a no brainer in this case.

It's not difficult to set up a Ltd yourself, but speak to an accountant (or 3) for some initial advice anyway. They should also advise on the most tax efficient way to pay yourself and it doesn't cost anything for an initial chat.

[Andrew at Boox]

If you have received at least £5564 (gross) salary from your permie employment since April then you already have your NI stamp for this year.

Any further dividends or salary paid this year would be taxed at the higher rate. If you work the contract through your own Ltd Co. then it's possible to retain any income within the company until next tax year. Going through an Umbrella Co. does not have this option.

Of course it depends on individual circumstances but I would say going Ltd is a no brainer in this case.

It's not difficult to set up a Ltd yourself, but speak to an accountant (or 3) for some initial advice anyway. They should also advise on the most tax efficient way to pay yourself and it doesn't cost anything for an initial chat.

Also, if you're going to be chatting to a few contractor accountants to get advice be sure to ask about insurances. So often we review contracts that aren't compliant with insurance requirements on the project (I'm talking about PI mainly)

[kingcook]

You only need 30 years to qualify for a state pension currently, so that may not be an issue.

FTFY

[Contreras]

Also, if you're going to be chatting to a few contractor accountants to get advice be sure to ask about insurances. So often we review contracts that aren't compliant with insurance requirements on the project (I'm talking about PI mainly)

Of all the things I might ask from an accountant, contract review is not one of them.

If my accountant tried to sell me "insurances" then I'd probably be looking for a new accountant.

[Andrew at Boox]

Of all the things I might ask from an accountant, contract review is not one of them.

If my accountant tried to sell me "insurances" then I'd probably be looking for a new accountant.

I agree, unless they're also regulated by the FSA they shouldn't be advising or selling insurance. It's just letting them know it's required by the contract. Whether it's actually purchased or not is up to the contractor.

[Contreras]

I agree, unless they're also regulated by the FSA they shouldn't be advising or selling insurance. It's just letting them know it's required by the contract. Whether it's actually purchased or not is up to the contractor.

Things to look for in a contract:

- Payment Terms.
- Notice Periods (or lack of).
- Key IR35 Pointers.
- ...
- ...
- ...
- ...
- PI insurance.

In that order, roughly speaking.

IMHO, YMMV.