to think this tax loophole is wrong (if true)

[devon004]

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.

Her husband is an accountant so is unlikely to need one. Although wonder if they have factored holidays in.

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.

You pay NIC on anything over £8k.

Think it is a contractor situation but I guess he will be stuffed if he stays longer than 2 years

Why?

If her dh is really busy, he may not have the time to do all the books, even though he is an accountant.
My friends dh is a chef and he never cooks at home. if he is looking after the dc they are lucky to get fish fingers

They were told you c8uld only stay in the same place for 2 year or Inland Revenue may say you are employed.

It's how most limited companies work AFAIK, certainly with the people I know.

If you have a regular contractor they may seek to say regular employment but it's rare that HMRC would do that.

You still pay tax by the way, but it just means that generally you aren't hit by the 50% tax bracket. Most accountants recommend this and it is completely legal. Not like tax evasion at all.

You're friend is wrong .... Hmrc count dividends as income. The higher wage earner will have to pay it back.

Belinda that's not right though because you're forgetting that you've already paid 20 percent corporation tax.

So for your £100 earned you pay 20 percent corporation tax. You have £80 left. You then pay 32.5 percent dividend tax with a dividend tax credit giving an effective tax rate of 25 percent. This takes another £20 from your £80. You are left with £60 from your £100 earned (as a higher ate tax payer). Its therefore the same as those paying 40 percent income tax through PAYE.

There is a small NI saving.

Most company directors take their money like this. I take a small PAYE salary to keep up with my NI contributions (for state pension purposes in the future) and everything else as dividends.

Whether your friend's DH can do this and escape scrutiny from HMRC will entirely depend on whether he's genuinely acting as a company providing a service or whether its a way of manipulating the system. If he's really an employee his employer would be very foolish to allow him to do this since they could end up picking up his PAYE income tax tab for him.

And the 2 year thing is wishful thinking - the IR can look at you at any time and decide you are employed based on how you work. If you are at the same desk in the same office for 40 hours per week, and you have to ask permission for holidays and you have to do whatever you are asked to do then you look like an employee even if you have only been there for a few months.

The reason most contractors in the IT/City have been limited companies is not the tax benefits (you are better off self employed) it's because the clients don't want more staff on the headcount, so they can't take on employees. They won't take on self-employed as if the IR decide you look employed rather than self employed the CLIENT is liable for unpaid PAYE/NI (based on what they pay you as the net). If you are through a Ltd Company you (your Company) are liable for unpaid tax/NI (IR35). Although I'm not sure whether anyone who has been caught by IR35 has taken their client/employer to court and claimed employee rights? You'd never work again so there wouldn't be much point.

Tax wise IF you need (say) £50K pa to live on, then you are about £4K pa better off by taking it through a company, with the minimum as salary and the rest as dividends (that's the saving on NI that you get by taking dividends). There is no tax benefit in taking the income as divis other than that. UNLESS you can a) save money in the company and take it as income in a year when you have less money coming in, so stay in a lower tax band or b) can split the company income between multiple employees/shareholders again to keep you both in lower tax bands.

In the case of child benefit you almost certainly could keep your income under the limit by use of expenses, or by giving a small shareholding to your partner so that it counted against their income instead. But you do still have to pay for accountants/ company filings etc, and you do lose all the employment rights (maternity pay, dismissal etc as well as pension contributions/holidays/sick pay).

There are better ways to keep your income under the limit for CB (bump your pension contrib by salary sacrifice) than to become a limited company.

Well put prepper

also, if the friend's DH is an accountant he will have to follow a strict ethical code or risk being in big trouble with his institute for unprofessional conduct, so anything he does would have to be completely within the law.

whether the law is "fair" or "unfair" is a totally separate question

This is a completely legal and sensible way to set up your tax affairs, PROVIDED you are actually a contractor and not basically an employee. HMRC will look at the evidence and if they deem you should be an employee then the sanctions for you and your employer can be large.

As people have already pointed out, it isn't totally straightforward and comes with extra administrative burden and costs too.

Yes, as explained above it is also not as straight forward as less tax if you have a company particularly if you need to draw all the cash out to live on rather than being able to leave it in the company only taxed at about 20% corporation tax.

This Government has decided that actively reducing your tax bill is some kind of moral wrong which is utterly stupid. As long as you operate within the law lawfully reducing your tax bill is a moral good.

Lotus

This is 2 threads where I have agreed with what you have said, I'm getting worried now
Yes, there is nothing wrong with reducing your tax bill if you are operating within the law. It makes sense to and we are finding new ways all the time as most businesses are.

Dawn, but it would be the same if he were a self employed sole trader like I am though, instead. I am self employed. I get none of those things and do not operate through a limited company. Not that I think there is anything wrong with paying as little tax as the law allows - it's a moral good.

And I've just come into my office defending that position against 2 sons with pretty much opposite views. Just wait until they are my age supporting families with no savings and paying an awful lot of tax.

In my experience, contractors don't take holidays. Or at least, they will take a week to go away with their family, but no where near the 5 weeks they would take if they were employees. Same as sick days, if they can physically get to the office, they do and then infect the rest of the office full of employees who do take sick leave so the company is far worse off

The rules about being a contractor are very strict.

My DH did this when he was in between jobs.

He registered with Companies House and hired an accountant.

He submitted invoices for his work, which were reimbursed 60 days later. Out of his company account, he paid himself a small salary, and took he rest in dividends.

I'm bummed now to think that I could have re-registered for ChB. :(

Yes its true. While not always straightforward, you are almost always better off to be 'self employed' and have control of your own tax affairs.

PAYE is for mugs and you get clobbered for everything.
If there is any prospect of your DH forming a LTD company (or even an LLC depending on your status) and being employed as an 'outside contractor' by his employer then you will most likely be significantly better off.

The tax loophole was introduced by Labour. Also around 2004/2005 they introduced a £10,000 zero rate of corporation tax. This meant that a person operating through a limited company could get out around £10,000 free of all taxes as a dividend and also the personal allowance then worth around £6,000 to £7,000. If a spouse was also employed in the business the tax-free amount increased.

It has been curtailed somewhat by later tax changes such as IR35 as stated. If Labour come to power they will increase the taxes on the self-employed specifically to include National Insurance Contributions on dividends drawn out of the smaller owner managed business and make other changes such as possibly higher taxes on BTL to fund affordable housing. This will be a significant move to shift wealth away from those in work and who can afford to pay higher rate tax, and with passive rental income, to those on zero hours contract, benefits and with little prospect of getting on the housing ladder.

But it doesn't work like that. They take more and more tax whether Labour or Tory and the state spends and wastes it. It never ends up going to the right people and certainly not middle earners which is one reason it is morally good to pay as little tax as the law requires rather than pernicious and immoral as Tories and Labour both suggest it is.

There is no low tax, small state party in the UK for whom most of us can vote tomorrow unfortunately. The Tories are just about the best of a bad job.

The only reason to go the self-employed/Ltd company route is if you are by nature a free- lancer or entrepreneur as it is a HUGE hassle. The only real difference in tax etc is that you don't pay NIC on dividends but you pay tax regardless of whether it's a wage or a dividend.
I have been self- employed for over 25 years but often wish I had the disposition of an employee -I don't - because my Lord is it a hassle!

In my experience, contractors don't take holidays. Or at least, they will take a week to go away with their family, but no where near the 5 weeks they would take if they were employees.

DH is an IT contractor and takes way more than the 5.6 weeks statutory holiday of an employee. It's one of the major perks for us. His daily rate is set to cover 6 weeks off, plus bank holidays. He has multiple, faithful clients who are more than happy for him to take time off. He often works for more than one at a time and works 12-14 hours a day to deliver what's needed, so it's only fair that he take time off to enjoy himself.

As people have said, there are rules as to whether HMRC would consider you truly a company or just an employee trying to look like an independent company, so it's not legal in every case. The fact that an accountant has done your books dues NOT neccessarily mean that it's legit.

I know someone who is always arguing for expensive policies, with the answer of how to pay for it being 'raise taxes'. First chance he got, he fiddled it when in a fixed term contract. Such a massive hypocrite, I really find it hard to get in with him now.

You are taxed on dividend earnings at whatever rate is applicable to your overall income. Your main saving is NI. But, it isn't really a saving as your are simply shifting the NI burden onto the company, and therefore still paying the tax overall via corp/NI. Which is why the HMRC are ok with this, the money is paid.

We do this, DH runs a Ltd Company. We were inspected 2 years ago. I had a long and full and frank conversation with the inspector. She fully expected to see our remuneration set up in this way. In fact, she questioned many things (all legit, we did a few bits incorrectly though lack of knowledge or oversight) but hardly touched this.

You save NI on the amount you pay yourself in dividends instead of salary The £10,500 PA is generally used as a salary because of the free NHI'ers of £2000.

The combination of corporation tax/income tax is the same.

CHB is based on all income (including dividends) so don;t get why that is different
Many people find running out of a ltd company and (generally) having to pay and accountant to do year end accounts and tax and annual return a pain in the arse.

If you get caught by the IR35 guidelines and you're investigated then you're stuffed. There is no 2 year rule. In fatc there is no rule but I think HMRC to paraphrase says if it walks like a duck and quacks like a duck then its a duck. And you will get clobbered with both employees and employers NI and possibly a nice litttle fine.

They were told you c8uld only stay in the same place for 2 year or Inland Revenue may say you are employed. he sounds like a bit of a shit accountant if he beleives thats true (and has to be told it by someone else)