to think this tax loophole is wrong (if true)

(60 Posts)
devon004 Wed 06-May-15 10:03:25

Dh earns good money. We are just in the bracket to lose child benefit but have high commuting costs etc.
I have just been chatting to a friend whose dh is doing a similar role to my dh is considering taking on a new role for less money but is able to do it as a Ltd co. He will take a small salary and than claim dividends for the rest of the salary which is taxed at a lower rate so will take home the same but will get child benefit and can claim for travel
aibu to think this is bloody unfai if true.

HelpMeGetOutOfHere Wed 06-May-15 10:05:46

i'm pretty sure it is true. It works in their favour in a lot of ways to be self employed. If you have a good accountant there are lots of things you can claim for. However there are also drawbacks to being self employed, such s unpaid holidays, lack of security in work.

namechange0dq8 Wed 06-May-15 10:08:34

It isn't as simple as that. The regulations that govern this are IR35, and if it looks like employment, it's employment.

www.contractoruk.com/ir35/

howabout Wed 06-May-15 10:11:58

Yes you can but I am also pretty sure you can use salary sacrifice to increase pension contributions or pay for other employee benefits and achieve the same effect. This doesn't affect me so you would need to check.

sparechange Wed 06-May-15 10:41:51

Is he a contractor? And will be setting up a ltd company to invoice his 'employer'?
Yes, it is do-able, but as others said, it is scrutinised by HMRC to some degree.
There was a bit of a fuss a couple of years ago when it was revealed that the BBC was paying staff in this way but it is how celebrities handle their money - for example David Beckham is a shareholder in his company which handles his endorsements and modeling. He doesn't get 'paid' for those jobs. His company does, and then he takes a (tax efficient) cut of what his company makes.

Minus2seventy3 Wed 06-May-15 11:08:45

I've been a contractor, and staff, and was a Ltd Co whilst a contractor.
It's not tax you save, it's NI. Base rate tax is 20%; Corporation Tax on dividends is... Guess what, 20%. No saving there. Difference is, you only pay NI on your paye element, not your "dividends". But having worked both sides, even that ain't really a saving.
Then factor in no paid holidays, accountant's fees (£1,000 a year), tax self assessments (which, if you bollocks them up, costs you hundreds in fines, so you pay your accountant even more to do it for you), possible audits by HMRC under IR35, no annual pay review, because that makes you look like a staffy, so the rate you come in on won't necessarily increase with inflation each year. Public liability insurance. Company tax returns.
People do make money playing the agency game, but usually only if you're willing to swap and change contacts regularly, which brings it's own risks of stability and security. Worth it for some child benefit? Think carefully.

soupey1 Wed 06-May-15 11:17:26

If you are only working for one company and HMRC find out they will probably decide you were really an employee and will then charge all back tax and NI as well as penalties.

RooftopCat Wed 06-May-15 11:26:19

minus surely you save on tax if you earn more than the higher rate tax threshold.
So, 20% up to £42k or whatever then you'd be charged 40% on PAYE. But you'd only pay 20% if paid as a dividend.

Minus2seventy3 Wed 06-May-15 11:36:10

Rooftop, yes, you're right. Taking a 37 hour week, and 47 week year, then using your tax free limit as the paye element, your looking at >£30/hr contracts to make it over that potential tax saving threshold.

Minus2seventy3 Wed 06-May-15 11:41:03

you're... Not your. Must proof-read before hitting post.

DisappointedOne Wed 06-May-15 11:43:20

This is how DH and I run our Ltd co too. There are some other costs through that you don't have as an employee - our accountant costs around £1200 per year, professional insurance, business cover on 2 x car insurance and 2 x motorbike insurance, business bank account charges.......

LotusLight Wed 06-May-15 11:49:10

A large state is a bad thing thus is will be wise to vote Conservative tomorrow. A large state with huge tax receipts does people no good. It is morally right to pay as little tax as is lawfully allowed under the law (evasion is a crime and a totally different thing of course). So you might argue the person who chooses not to incorporate a business when they might are choosing in effect to damage their family and are in the moral low ground, not high ground.

however it is not quite as simple as people are saying above. If you need to take all the money out of the company the way dividends are taxed you probably find you are not massively better off. If you can keep a lot of the money in the company and not use it need it or spend it then you can be better with the company. higher rate tax payers pay extra tax on their dividends.

morethanpotatoprints Wed 06-May-15 11:57:07

I don't understand what you mean tbh.
Do you mean he will still be employed by a company but also have his own company?

There are lots of perks to being a LTD company, but it's hard work.
You don't just do the actual job, you need to manage the company too.
Yes, you can claim travel, overseas travel, a percentage of utility bills if you run an office from home.
Yes, you pay tax on dividends and earnings, but you can take min wage if you want to.
Maybe look into and see what it would mean for your family to do this.
We started our company a couple of years ago, but dh had always been self employed. I am the company secretary, a director, book keeper, and general dogs body grin

whois Wed 06-May-15 12:14:01

In almost all circumstance being self employed and running in a limited company (if not doing dodgy IR35 stuff) will mean you pay less tax.

However, you don't always come out with a positive cash balance to you due to other costs as mentioned above.

You really do need to change contracts frugally, and be contracted at more than one company to avoid IR35 suspicion.

Most IT contractors at banks set themselves up as limited companies and in my experience, hardly any of them look good on the Ir35 rules and no one ever gets busted. So lots of people do get away with it.

IndridCold Wed 06-May-15 12:14:16

I do think that these regulations have been mis-used by some people, but unless you earn millions it is very much 'swings and roundabouts' as people have said upthread.

We have set up a Ltd company this year, not through choice but following redundancy. I think it is right that the HMRC should clamp down on people who are using this system while obviously only working for one employer (it has been very popular with top paid BBC people apparently) but you should not assume that all ordinary contractors have an unfair advantage and are sneakily earning lots more money by avoiding tax.

LotusLight Wed 06-May-15 12:20:24

Yes, I bill loads of people a month (about 30) and no way am I any kind of employee for any of them ( despite that I am still a sole trader by the way as I've not incorporated).

All Governments though are working on this issue - IR35 was just the start. If you buy a residential property in your company now and it is worth £500k or more (the new limit) you pay an annual tax on it called ATED - like a mansion tax thing; you also pay 15% stamp duty if you buy a property within your company etc etc.. ... It is by no means as straightforward as there is always less tax if you incorporate a limited company.

morethanpotatoprints Wed 06-May-15 12:22:18

There was a similar one years back, my dh was caught up in.
he taught music as a peri in private schools.
He was employed by them but they wanted him to be self employed.
He was issued with info from HMRC basically telling him it wasn't on.
The school were responsible though as they had him down as being self employed and i think they were either fined or told to stop this practice.
I don't have all the details as this was a long time ago aprox 10 years ago. However, HMRC were clamping down on it even back then.

ChipsAndEgg Wed 06-May-15 13:17:06

minus you don't save on tax, as your tax rate also goes up once you get into the 40% bracket - you just pay the difference. Main saving is NI.

RooftopCat Wed 06-May-15 13:38:30

Do you need to employ a registered accountant or can anyone do your books? Do the accounts have to be audited by anyone 'official'?

Belindabelle Wed 06-May-15 13:41:33

I think you do save tax. If you withdraw dividends from a Ltd company

You pay 10% tax on the first 31,785
32.5% on 31,866-150,000
37.5% on anything over 150,000

Most contractors pay themselves a basic salary of around 10,500 to use their personal allowance. I think this also avoids having to pay NIC.

LurkingHusband Wed 06-May-15 13:45:41

There are various tests HMRC will apply ...

1) Who provides materials/tools ? Employer, or Ltd. Co. ?
2) Who dictates the hours of work ?
3) Who pays for training ?
4) Has the Ltd company the right to send someone else to fulfil the contract ? (This is a key test).
5) Is the contract fixed length, or open ended ?
6) What input does the company have to the contractors work ?

are key.

Back in the late 90s, a large company I worked for was riddled with this. Within 5 weeks, 7 people "left" only to reappear on Monday morning as "contractors". They very quickly became employees again when IR35 was introduced.

Theoretician Wed 06-May-15 13:55:16

Yes you can avoid losing child benefit by taking some "work income" as dividends instead of salary. You can also do so by taking it as pension instead of salary. The latter route also works for people who don't have their own company, as long as their employer allows salary sacrifice.

There's a fundamental inequality in the tax system: on income in the basic rate band, employment income is taxed at nearly 40% of what the employer pays out (employer and employee NI plus 20% tax), while self-employed income is taxed at roughly 30% (no employer NI), but dividend income from a company is taxed at only 20% (no NI at all.)

There is no reason why any two people who receive the same net income should generate vastly different income tax revenues for the government. It's just a question of what government thinks it can get away with, and employees are sitting ducks. Employer's NI is a particularly stealthy way of fleecing them, as employees fail to realize that economically it is just as much a tax on them as the payroll taxes they are personally liable for. (Don't assume contractual salary will be the same in all possible universes. What the employer pays out and what the employee gets net should always be the same, as they are determined by market forces. Contractual salary is just a nominal amount that will be shunted towards whatever figure between the two yields the required numbers, for a given split in the legal liability for taxes.)

felkov Wed 06-May-15 13:56:32

OP its not unfair, just different.

in theory your DH could also set up his own company and do the same thing.

But then he'd be exposed to all the risks and burdens of being a company director; no holiday/sick leave/IR35 risks as PPs have mentioned plus the annual filings needed (accounts/company tax return/Companies House returns etc) and having to employ other people (e.g. to do his payroll taxes) rather than being a straightforward employee.

would keeping your child benefit be worth all that extra hassle?

HoneyDragon Wed 06-May-15 14:01:38

You don't keep child benefit if you are on dividends.

devon004 Wed 06-May-15 14:09:03

My friend believes they will keep chb as he will taking a pay cut but won't see difference in drawings etc due to beneficial tax situation as salary plus div will be just shy 50k. To me it seems a way for the new company to get away with paying less. Think it is a contractor situation but I guess he will be stuffed if he stays longer than 2 years.

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