Advice please from accountants who understand IR35

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Hi,
My partner has been offered a new role as a contractor which falls outside IR35.

On a daily rate of £700 please can you say whether it will make most sense to create a limited company and receive a directors salary and take dividend payments (I can potentially be a shareholder also as I don’t currently work so am not using my personal allowance).

Or the other option is to use an umbrella company who will manage corporation tax (and maybe VAT) and we’ll just manage personal tax due on dividend payments via self assessment.

We will definitely employ an accountant if a limited company is set up as it’s a bit complex for me to manage myself.

Secondly, I’m finding it hard to get the correct answer to this: I understand that a person earning over £100k loses their personal allowance. Does this apply to PAYE income only or ALL income? I presumed it to mean all income (so specifically for our case, PAYE and dividends) but an umbrella company have advised differently so I’m uncertain now.

Thank you!

I am not an accountant but am pretty sure that a Ltd with just one client woukd fall foul of IR35. He would be expected to be taxed as an employee.

I'm confused when you talk about using an umbrella company but also taking dividends?
If you use an umbrella company they effectively are the employer and you pay PAYE. Corporation tax wouldn't be payable and you wouldn't be able to draw dividends
They sort everything tax wise but there are additional payments that need to be made

Having just one client is not a problem for IR35, it just depends on the terms of the relationship between the contractor and the client and whether they have « direction and control ».

It’s unusual but not impossible to use an umbrella if outside IR35. I think you would be best to contact a few umbrellas to give you an illustration and have a look at online calculators. You shouldn’t have to pay Corp Tax then as you wouldn’t have a ltd company. You pay tax, NI and employers NI. Ask an accountant to do the same for Ltd Co option.

If you’re looking at tax efficiency, either employers pension contributions (Ltd) or salary sacrifice (umbrella) are your best options, factor this in when asking for illustrations.

One thing to consider, if there are costs associated with the contract, e.g. travel, they can be deducted from your tax liability with a Ltd company. Normally this isn’t possible if inside IR35, but in your case where the contract is outside but still working under an umbrella, I’m not sure how it would work.

Re the 100k, surely he won't be earning that as salary, the company has that income and he will be taking dividends, his salary will be around £1k a month.

Have you got an accountant?

I’ve had this debate with my accountant who was firmly of the view that you want to avoid an umbrella company at all costs as the most tax efficient way is to be a Ltd company and pay corporation tax etc. If you do the sums on an umbrella company calculator it shows you pay a lot more ni contributions and more tax overall.

I think what’s caused confusion for me today (and in my OP) is that we’ve spoken to an umbrella company with the intention of DP being an “employee” of them and they would obviously deal with all the tax etc at source so less hassle for us. However, it looks like they’ve actually sent us details of them acting as accountants for this contract as have advised to set up LTD company and given dividend breakdowns etc. Presumably, as someone above has said, an umbrella company wouldn’t really be used in this situation, in the way I thought they might.
@Jmaho this is where my confusing details came from but I can see that makes little sense now!

@bryceQ no £100k wouldn’t be from salary but the overall income for the year would exceed £100k more than likely, so I was unclear whether the personal allowance would still be reduced to zero or if that’s only an applicable rule when the income is from salary? If someone received £150k dividends and this was their only income for example, do they still have the benefit of their personal allowance?

We will definitely be using an accountant! But just trying to get a bit of an understanding of it all.

Stay away from umberella companies. They're schemes generally aren't complaint and don't stand up to investigation.

It's unlikely if your husband is working full time
for one client long term there is anything to be gained from Setting up a limited company.

If you go down this road please go and talk to a chartered accountant and get proper advice.

We have done both.

Limited company where we had several clients. Paid ourselves a small monthly wage and took the rest as dividend as that was the most tax efficient way at the time. Dividend rules have since changed I think? We had a good accountant who was sensible about not trying to milk the rules.

Have also used an umbrella company (for work that fell within IR35). Essentially treated as an employee and paying PAYE and NI.

I’d advise speaking to an accountant about the best way forward.

Another factor for us was DC were over 12 so going limited company and me being company secretary (I did all the admin) meant I could get NI credits for my state pension.

Not true.
many contractors work under a ltd company and have one client at a time.

You need to consider if he’s going to be working long term for this client (2+ years) if he is and has no intention of contracting for another client after then he’s better off going umbrella.
if he’s going to have multiple clients over a period of time then ltd company is better.

With corporation tax increasing this year on top
of the increased dividend taxes it’s harder to make being a Ltd Company director worth it.

If someone received £150k dividends and this was their only income for example, do they still have the benefit of their personal allowance?

No. The £100k is adjusted net income.

https://www.gov.uk/guidance/adjusted-net-income

I know this is a few days old now, but hopefully OP is still around!

Is the company your DH is going to be working for a larger business? If it is, then the decision on whether a contract is inside or outside IR35 lies entirely with them.

The good news here is that it appears that this is the case and they have decided that it's outside.

This is good news because if HMRC do decide to challenge that decision, it's the employer they'll go after, not your DH, and therefore you can do whatever you'd like in terms of his earnings.

How long is the contract for?

If it's only a 6 month contract will no scope to renew, it might be an administrative hassle in setting up a company to save some tax.

If it's either a longer project, or is likely to lead to further similar contracts (though each contract is reviewed by the client on a case by case basis, so it may become an "inside" contract later), then having a company is going to be better.

We recommend to clients that they take a salary equivalent to the Employers NI rate of £175 per week (so £9,100 per year). At this rate your DH would be "paying" NI but at a rate of 0%, so is still earning a State Pension credit.

Anything over and above that that he takes from the company is treated as a dividend payment and subject to those rates instead.

This set up used to be very, very tax advantageous, but with the increases in Corporation Tax and tax on dividends this advantage has narrowed significantly.

On a £700 day rate though, the earnings are potentially significant over a longer contract, so it would be beneficial still to operate through a company.

I would recommend engaging an accountant to provide you with some formal advice and to help set up the company etc.

Your DH will also have to be wary of the VAT registration threshold. At £85,000, he'll only have to work just over 5 months before he hits it.