How much salary should I pay myself as a Limited Company contractor?

How much salary should I pay myself as a Limited Company contractor?

Making the right choice on the level of salary to draw as a Limited Company director and contractor is one of the more important decisions to take. Surprisingly though it’s not just an annual decision, taken at the beginning of each tax year, but one that should be revisited whenever changes occur in your circumstances.

To fully understand the mechanics affecting the choice of salary requires a working knowledge of Income Tax (PAYE), National Insurance and IR35, Corporation Tax and the rules concerning National Minimum Wage and that’s something your specialist contractor accountant can help you with. But to avoid a detailed technical analysis we can whittle these down to a short list of considerations:

I’m subject to IR35, so it makes no difference

If you are subject to IR35 your eventual salary is determined according to the defined rules of IR35; however you retain the choice of how much to take during the year that affect the amount of tax payable and when it is payable.

The Employment Allowance (EA) was introduced in April 2014 to provide a deduction of up to £2,000 from the Employer’s NI payable by your company. However EA is not available to any part of your salary determined as a deemed payment under IR35 and so only deductible against Employer’s NI payable on normal salary. You should therefore set a level of normal salary that utilises the EA limit. For 2015/16 the level of salary that fully utilises EA would be £22,552.

The second choice concerns timing of tax payments. Taking a monthly salary that utilises EA will result in quarterly PAYE and NI payments, whereas the tax on the deemed salary is payable at the end of the tax year. So it would appear better to keep your salary low enough to utilise the EA and leave the IR35 balance to be determined at the end of the year and pay PAYE and NI much later.

Although one point to appreciate is that any money taken from the company on account of a final IR35 salary will be a loan and subject to beneficial loan interest rules when the loan exceeds £10,000. A minor point not to be overlooked.

What about National Minimum Wage (NMW)?

New rules introduced in March 2015 mean that any failure to pay NMW can result in a fine of £20,000 per employee. Ok, this is unlikely to be an issue in practice, but HMRC can take action where the NMW rules apply and such a fine is an attractive motivator.

NMW only applies to Limited Company contractors who are the directors of the company where there is a contract of employment, and to the company’s employees. If you are one of the few contractors that has issued a contract to yourself then you should pay the NMW. Since October 2014 this is £6.50 and from October 2015 it is expected to be £6.70.

NMW has no influence over IR35 status and can be ignored where no contract of employment exists.

Are you thinking of pensions?

The level of salary taken affects the level of personal pension contributions you are able to make that take advantage of the tax benefits. If you pay pension contributions then you should seek advice from your financial advisor on the minimum required level of salary to support the tax benefits.

I’m outside IR35, pay enough to support my pension provisions and don’t have a contract of employment

Congratulations, you have complete freedom of choice. You can set any level of salary that now suits your personal circumstances and your view on tax. The next step in this discussion assumes that you want to minimise tax. If that’s not your driver then select any level of salary that you want and can be supported by the company’s income.

Most contractors are aware that dividends incur less tax than salary because NI does not apply to dividends. However there is a minimum level of salary that should be taken that overall reduces total tax (Income Tax, National Insurance and Corporation Tax). That minimum level used to be linked to the thresholds when NI became payable, however since the introduction of EA the best level of salary is linked to your personal tax allowance.

Personal Allowances (or your tax free allowance) changes every year. For 2015/2016 most contractors start off with Personal Allowances of £10,600. This typical level may be reduced if you have tax liabilities from earlier years that are collected via your tax code or you have any taxable benefits in kind. If you are not sure then obtain a copy of your tax code calculation from HMRC.

Your Personal Allowance is a tax free allowance and is set against your total income. So if you have other income such as interest or rental income then deduct the gross value of that other income and you are left with your available personal allowance.

The level of your available Personal Allowance is often the best level for your salary that achieves the least tax liability overall.

Let’s explain that with some examples:

Assumptions:

  • Personal Allowance is £10,600
  • No higher rate tax (but only to keep it simple)
  • No other income
  • Profit after expenses but before salary £40,000
  • Available dividends are declared
example salary

Conclusion: Salary at Personal Allowance is the least tax

Now let’s compare the result where Personal Allowances are £8,000 because of underpaid tax brought forward

Assumptions as above except:

  • Personal Allowance is restricted to £8,000

 example salary 2

Conclusion: Salary at Personal Allowance is still the least tax

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

New contractor guide to Corporation Tax

New contractor guide to Corporation Tax

Corporation Tax is a levy on taxable profits which is applicable to active Limited Companies incorporated in the UK. If you’re a contractor who has recently set up as a Limited Company it’s helpful to be aware of how this tax works and how it applies to your own company. As a director of your company – under the companies Act 2006 – you are ultimately responsible for ensuring that your company is fully compliant with HMRC regulations. This means that your company must pay the correct amount of Corporation Tax and file an accurate Company Tax Return. Failure to do so can, at the least, result in undesirable fines and penalties.

In many cases a contractor accountant is appointed to help with this which makes this area much easier. A contractor accountant will be able to assist with preparing and filing your Company Tax Return as well as offering expert advice on how to make legitimate tax savings through your company.

Registering for Corporation Tax

HMRC will send you a newly formed Limited Company form – Corporation Tax: Information for New Companies – within a few days of your company being registered at Companies House. Even if you don’t receive this, you must register for Corporation Tax with HMRC within three months of beginning to contract through your company; otherwise a substantial penalty could apply. Registering can be done by post using the form HMRC sends you or online at HMRC’s website. This can be done by you personally or by your contractor accountants on your behalf.

How Corporation Tax is calculated

Your Corporation Tax bill is calculated as a set percentage of the net profit of your business. The net profit is calculated as gross profit less allowable expenses.

Gross profit in a business includes:

  • Ordinary trading profit – profit from your usual contracting activities.
  • Profit made from any investments.
  • ‘Chargeable gains’ – profits from the sale of assets like property or shares.

Deductable expenses can include items such as:

  • Communications, stationery and other general office costs.
  • Allowable business travel including car and public transport expenses.
  • Accountancy, legal and other professional fees.
  • Wages, salaries and other staff costs (including any salary you pay yourself).

The Corporation Tax percentage chargeable varies according to the size of the net profit of the business. Currently, the main rate of Corporation Tax applicable to the majority of the bigger mainstream businesses is 23% (which will be falling to 21% in 2014). However, most contractors will qualify for the small profits rate of 20%, which applies to qualifying companies with profits of up to £300,000.

How to file and pay for Corporation Tax

Corporation Tax, unlike other forms of tax, can only be paid electronically and the payment must be made before the Company Tax Return is filed. Also, HMRC specifies that the supporting tax calculations and accounts which form part of the Company Tax Return must also be filed. This means its vital that all your contractor accounting and records are in good order to ensure all relevant information is readily available for you or your contractor accountants to work with.

The payment deadline date for your Corporation Tax depends on the size of your taxable profit. For contractors who have profits of up to £300,000 (or if higher, less than £1.5million) payment must be made by the ‘normal due date’. This is 9 months and one day after the end of the company’s Corporation Tax accounting period.

The filing deadline date for your Company Tax Return and supporting information is within 12 months of the end of your company’s Corporation Tax accounting period. This date is known as your ‘statutory filing date’.

Getting expert help

There’s no doubt that Limited Company accountancy can become complex and getting tax calculations right is an important part of running your business successfully. This is why the majority of contractors appoint a specialist contractor accountant to take expert care of this. Contact us at Intouch Accounting to find out more about our Monthly Service package and how it can help ease the pressure of running your contractor Limited Company.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Buying property in my own Limited Company

Buying property

Can I or should I in my own Limited Company? Is it common, what are the risks and basic consequences? Does it only affect commercial property?

For contractors the question of buying property through their own Limited Company arises when considering possible ways to invest their profits. It is definitely possible to do this. Whether it is actually advisable and tax efficient is a different question and can vary from case to case.

 

Tax considerations

Buying a second property in your own name will mean that any rent you receive will be taxed on you personally, using up some of your tax band and thus leaving less availability for basic rate dividends, and any gain you make on the eventual sale will be subject to Capital Gains Tax at either 18% (basic rate) or 28% (higher rate).

If you decide to buy through your company on the other hand, any rent received and eventual gain on sale are both subject to Corporation Tax at 20%.  If you are registered under the flat rate VAT scheme then any rent you receive will constitute turnover for VAT purposes, and you’ll have to pay a proportion to HMRC each quarter.

 

Company ownership considerations

The property will be owned by your Limited Company and will therefore be tied to its fortunes. Should the company experience any difficulty, either legally or financially, then the property would be at risk as an asset of that company. Should you wish to dissolve the company then the property would need to be transferred back to you before this could occur. This would of course involve additional related legal costs and taxes payable.

If the property is your main private residence then company ownership is not recommended.

Firstly, you would incur a benefit in kind, unless you paid commercial rent to the company. Secondly, any gain on selling the property would be subject to Corporation Tax. Under normal circumstances any gain on your own home is usually exempt from tax entirely.

 

Mortgage availability

In order to secure a mortgage, particularly with newer Limited Companies, a director’s personal guarantee may be required. If given this takes you out of limited liability protection of your own personal assets.

If this is something you are currently considering then speak to your accountant who will be able to advise you on the best course of action based on your particular circumstances.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.