Dividends and salary: getting the balance right

If you’re considering setting up your own contracting firm by trading under a Limited Company, then taking a mix of salary and dividends is the most tax-efficient way to take income from the business.

Due to the implications associated with drawing a £Nil salary, many contractors choose to pay themselves a modest salary, topped up with dividends.

For instance, you could pay yourself a basic salary up to the limit of when NI contributions become payable – the threshold for the current 2018/19 tax year is £8,424. Yet, while it’s your decision to do this, remuneration at the NI threshold is lower than the National Minimum Wage.

As of 1 April this year, the National Minimum Wage for people aged 25 and up is £7.83 per hour which, when full-time hours are considered, works out at approximately £14,250 per year. Taking a salary at this level may be a better alternative to taking one below the NI threshold, as it will demonstrate your intention to operate a genuine commercial, contracting business. There is no advantage to withdrawing a salary in excess of this figure however, except in ‘special’ circumstances.

 

Drawing a £Nil salary

So, you may be wondering: Can I take all my income as dividends and not pay myself a salary? The short answer is yes, you can; however, doing this has a number of implications you need to be aware of. These include:

 

The effect on future entitlements

Paying yourself a £Nil salary will mean you do not pay any National Insurance. However, not paying NI contributions could affect your entitlements later down the line, including the state pension and a number of other state benefits.

 

Investigations by HMRC

If you’re not taking any salary from your business, it’s possible that HMRC will argue that the dividends paid or declared incorrectly are in fact ‘salary in disguise.’ In this case, HMRC will seek to tax the dividends as salary.

 

Corporation Tax Relief

Any salary that your company pays to you will qualify for Corporation Tax relief. This means that if your company pays you £8,424 it will save £1,600 in Corporation Tax.

This combined with the fact that this income is tax free for you, as it’s within your personal allowance, makes a nominal salary very tax efficient.

 

Finding a balance that’s right for you

Of course, striking the right salary/dividend formula will be entirely dependent on your individual circumstances – there isn’t a one-size-fits-all solution. Many factors will need to be considered, such as:

  • Your age
  • Likely length of career
  • Projected income levels
  • Views of pensions planning and saving
  • Family status
  • Income from outside the business
  • IR35 risk status
  • Cash requirements to fund lifestyle

 

With all these factors to bear in mind, it can really help to turn to the professionals to help in your decision, like the team here at Intouch. We’ll help you get your business up and running and can advise on how best to withdraw income from your company. If you’d like to find out more, call our experts on 01202 375293. And, in the meantime, take a look at our new guide on combining salary with dividends.

 

 

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.

Demystifying dividends: a beginner’s guide

For many full-time contractors, the opportunity to earn a higher salary is among their main reasons for making the move. That, along with the freedom and enjoyment that comes with owning their own business.

If you’ve decided to set up your own Limited Company, you want to be certain it’s created in the most tax efficient way. After all, you’ll be working incredibly hard for your money, so you don’t want any more going to the tax man than has to.

Dividends are a great way to maximise the income you take from your business. If you’re not too sure of what they are, here’s an introduction:

 

In a nutshell…

Dividends are essentially a method of taking income from your business. They are payments made to the company’s owners – aka its shareholders – from accumulated profits, after business-related payments such as Corporation Tax and VAT have been made.

The main rule for withdrawing dividends is that your company must have enough ‘retained profit’ in the bank to cover them. Withdrawing dividends from untaxed earnings is illegal and, if caught, you could land yourself in serious hot water with HMRC.

Any profit that remains once you’ve withdrawn the dividends can stay in the account, where the money will hopefully accumulate over time.

 

What are the advantages?

The main benefit of drawing dividends from your Limited Company is that you won’t have to pay National Insurance Contributions (NICs), regardless of your Corporate Tax or Personal Income Tax rates. That’s why many business owners choose to pay themselves a modest salary, topped up with dividends.

 

Are there any disadvantages?

The only real drawback to dividends is that there must be profit in the business in order to declare them. If it’s not turning a profit, you’re still able to pay yourself a salary or bonus, even if it means you declare a loss – a situation you hopefully won’t find yourself in.

Taking dividends is something that must be decided on by every company shareholder, which could cause issues if there were multiple shareholders or an outside investor. Yet, these cases are unlikely to apply to you.

 

Who can dividends be paid to?

Dividends are separate to bonuses and salaries and can only be paid to the shareholders in the business. Many contractors will name a spouse as their shareholder, with dividends split depending on how much share capital each person owns. This can lead to even greater tax efficiency.

 

How are dividends taxed?

Dividends are taxed as personal income. The first £2,000 of dividend income is free of tax under the dividend allowance, with further dividends taxed at the following rates:

Within the basic rate threshold (income between £8,425 and £46,350 for 2018/19) = 7.5%

Within the higher rate (income from £46,351 to £150,000 for 2018/19) = 32.5%

At the additional rate (income exceeding £150,000 for 2018/19) = 38.1%

 

Find out more

Now you’ve got a clearer idea of what dividends are, there are rules to be aware of when it comes to declaring and balancing them with your salary. We thought it would be useful to put together a guide on combining salary with dividends for people making the move into contracting.

If you feel like you might need a helping hand setting up your business, the team at Intouch can help there, too. We’ll pair you up with your own expert Personal Accountant, who will help with everything from incorporating your company with HMRC, to setting up a business bank account, to insuring your company. Make the first step by calling our team today on 01202 375293.

 

 

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.

 

How to get started as a contractor – Infographic

If you’d like to know what happens once you’ve joined Intouch as a Limited Company contractor, then take a look at our infographic to see how easy the steps are…

Onboarding for newbies infographic

A handy guide to contractor insurance

If you’re just starting out in contracting, you’ll no doubt have a long checklist of things you need to do before you can reach out to clients. One of these tasks will be taking out quality insurance for your new Limited Company.

We understand that the world of insurance can feel like a minefield, so let us help! The Intouch team has put together this simple guide explaining the types of cover you’re likely to need – but first, that all-important question…

 

Why exactly do you need insurance?

Like any other business owner, contractors need to protect themselves against a number of risks. Arguably the main risk for contractors is a third-party claim against your business – for instance, if a client accuses you of negligence or damage to their property.

Without cover, a single claim could tarnish your reputation and cost you thousands of pounds to put right. It could very well spell the end to your small contracting business.

But also, you’ll find that having insurance is an essential requirement in the contracts you have with agencies and companies. A quality insurance policy will protect you against the unexpected and give you peace of mind with each new contract you take on.

 

The types of insurance you’ll need

Cover comes in all shapes and sizes – here are the types of insurance you’ll need in order to fully protect your Limited Company:

 

• Professional indemnity

If a client believes you’ve done something wrong in your work, known as ‘professional negligence,’ this cover will protect you against the financial implications of them claiming against your company. For instance, it will pay out legal defence costs and damages awarded to the client.

 

• Public liability

As the name implies, this cover is needed if you deal with the public – for example, if your clients visit your office or you work at their premises. It offers protection in the event someone is injured or property is damaged as a result of your work.

 

• Employer’s liability

This protects you against claims made by employees. As you don’t have any employees, you might be wondering why you need it? However, you’ll find that many agencies and clients require you to have employer’s liability cover, alongside public liability and professional indemnity insurance.

 

• Directors’ and officers’ liability

As the director of your own business, you could be held accountable for a number of legislative breaches involving things like mismanagement, health and safety failure or failing to comply with company law. This insurance will cover the financial costs of a claim to make sure it doesn’t take a hit on your bottom line.

 

• Occupational personal accident cover

If you’re injured while working and your business grinds to a halt, it’s almost certain that you’ll be at a financial loss. This insurance pays out a regular sum of money whilst you get better, so that your finances don’t add to your worries.

 

Secure insurance through Intouch

Intouch Accounting has partnered with reputable insurance provider Kingsbridge, which specialises in comprehensive contractor policies. To make things easier, Kingsbridge offers an insurance package which includes professional indemnity cover, as well as public and employer’s liability. You can also boost protection with directors’ and officers’ liability and personal accident cover.

And if you’d like support getting your business off the ground, find out more about Intouch’s services by calling one of our experts on 01202 375293.

 

 

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.

Working From Home – where do you start?

Why work from home?

Contracting and freelancing are fast becoming the choice career moves for more employees each year in the UK and it’s evident why. Being your own boss allows more flexibility and the chance for a better work/life balance. Choosing the jobs you want, and when and where you do them is also a great perk. Some might say that they choose to work from home because a relaxed atmosphere increases productivity and efficiency, while others just like to avoid office politics. There are a whole host of benefits to home working, particularly from a health and well-being point of view.

 

Making it work for you

Most contractors prefer a combination of remote and on-site working, to ensure some kind of visible presence, or because they enjoy the variety it brings. But for those wanting to ditch the office environment entirely, these are some things to consider:

 

Advantages

•Arranging your routine to suit you

•Freedom to spend time with friends and family

•Setting up your work space however you like

•No commuting saves time and money

•Less stressful environment

 

Disadvantages

•Distractions such as housework and people who share the same building

•Finding it harder to switch off

•Feeling isolated. If this is a concern, take a look at our infographic for tips on how to make those all-important connections.

 

Setting up a workspace

The beauty of home working is that you can set up your space to suit your needs. You can use a spare room, convenient corner or even under the stairs – technology means workspaces can be much smaller these days, so don’t build that garden office just yet!

Make sure the space is as comfortable and efficient as possible. Get suitable furniture such as a desk at the correct height and a chair, which is good for your posture. Try not to buy expensive equipment to start with – basics would be a computer, printer and scanner – you’ll soon find out what’s essential. It’s also useful to have a smartphone specifically for business, which you can set to voicemail after hours.

And think carefully about colour and decor, which affect your mood more than you might think.

 

Be professional about it

Communication is one of the most important aspects for making homeworking a success, so reliable broadband is a must, as is making yourself contactable and available to speak during working hours. Respond to clients promptly so they know you’re on the job – they’ll want to make sure they’re getting their money’s worth after all. And don’t be tempted to slob around in your dressing gown all day either! Clients will expect exactly the same standards as someone who is office based, and ‘getting ready’ for work will put you in the right frame of mind too.

 

Costs and claims

Due to virtually no set-up costs, working from home is one of the cheapest ways to start a business. If you’re intending to claim expenses through your Limited Company, your home office should be adequately arranged to indicate that it’s a genuine business and not part of your normal domestic arrangements i.e. working from a dining table the family eat at every evening.

It’s also not sufficient to spend a few minutes a week on admin, you actually need to be working at your home office and generating income to justify a claim.

We’ll discuss more about this particular topic in our next blog, but in the meantime a good Specialist Contractor Accountant like Intouch will be able to advise on Home Office Deductions.

 

If you’d like more information on Working From Home – download your free guide here.

 

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.

The flexible working ‘movement’: where are we with it?

Today’s complex working landscape presents businesses with the challenge of meeting the demands of people with very different values, expectations and needs. Yet, they all seem to share a desire for flexible working.

It’s little wonder, then, that the flexible working movement has gained such momentum in the last decade. Employers have recognised that the traditional workplace is no longer fit for purpose. But we’re yet to reach a point where flexible working is ‘the norm’, even four years on from the introduction of laws by the UK government which gave everyone the legal right to request flexible working.

 

To use the ‘right to request’ or not

People are still unsure whether or not to use their right to request flexible working, for fear it could be perceived as a sign that they are less than dedicated to their job. In a study conducted by social media training experts Digital Mums last year, more than half (51%) of UK employees believed that asking for flexible working hours would be viewed negatively by their employer and a further 42% thought it would have a negative impact on their career.

Millennials, who are one of the key drivers of the movement, were particularly wary of not wanting to upset their employer, with two-fifths (40%) saying they’d be too nervous or worried to ask for flexible working hours, despite eight in ten (77%) wanting this way of working.

Those fears might very well be legitimate. According to a new joint report from flexible working experts Timewise and consultants Deloitte, more than 30% of workers who opt for flexible hours feel they have less status and importance as a result. A quarter of the 2,000 people surveyed also thought they had missed professional opportunities because of this.

For freelancers and contractors, there aren’t the same lingering fears, although they might have some concerns about whether working remotely could impact on the relationship with the client, if there is an expectation to be on site every day.

 

Remove the need to request

As we revealed in our previous blog on the pros and cons of flexible working, however, any concerns employers might have about what flexible working could do for business are often shown to be ill-founded.

Ask anybody who works flexibly whether they work harder and more productively now than they did when they were in a more structured setting and the answer would be unequivocally ‘yes’. Flexible workers often say they feel like they owe it to their company to go beyond the call of duty every day. While that brings up another issue entirely around work/life balance – another main driver of the movement – it goes to show how much staff value flexible working.

In a recent piece of research by SmallBusinessPrices.co.uk, more than a quarter (28%) of respondents said they value additional holiday days, sabbaticals and flexible working hours as employee benefits, over receiving a pay rise.

By promoting flexible working – rather than making employees request it – employers could find themselves with a line of new talent at the door, while holding onto the existing talent they already have in the building.

It could even help end gender discrimination in the workplace. According to the Timewise/Deloitte report, one of the biggest barriers to gender equality and pay parity is employers’ continued refusal to accept non-traditional working practices.

Timewise chief executive Karen Mattison stresses that the family structure in which one person stayed at home and another went out to work is “no longer the case for the majority of UK households” and employers need to react by changing their flexible working practices.

With the technology available today to facilitate flexible working, it’s never been a better time for individuals to dictate how long, where and when they work. More and more people are taking the plunge and ‘going it alone’ as either a contractor or a freelancer.

Of course, with Intouch Accounting by your side, you’re never alone. We are here to support you by answering any questions you may have, from assessing whether it’s the right time for you to contract or freelance, to helping you set up a 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.

IR35 in the private sector – HMRC announces consultation

In last Autumn’s Budget, the government announced that it would consult on how to tackle non-compliance with IR35 rules in the private sector. On Friday, HMRC issued this eagerly-awaited consultation which they say “looks at improving the rules around ‘off-payroll’ working so contractors who work through their own company pay the right tax.”

At Intouch, we would suggest that HMRC learn from the negative feedback following the public sector reform and at the same time, remember that private sector and public sector hirers are different entities with different motivations and potential responses. They engage with their clients in different ways and often at different levels and as such we’d encourage HMRC not to view them as the same with respect to off-payroll rules and deemed employment. Input should be taken from across the industry with a view to tailoring a bespoke private sector solution that improves compliance whilst mitigating any potential administrative burdens.

The consultation timescales mean that any changes could be introduced as early as April 2019, although we’d urge HMRC to take the time to consider timings very carefully to avoid any negative impact to the UK economy as we move forward with Brexit.

Intouch will be responding to the consultation and we encourage all other interested parties to contribute; that means contractors as well as end-hirers who want to continue to have access to and support self-employed contractors. You can see the consultation and how to send your response here – you have until 10th August!

If you want to have your say but need to brush-up on your IR35 knowledge, check out our resources below:

Guide – Embracing IR35
Infographic – IR35; Don’t panic!
IR35 FAQs

 

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.

 

How to get your Limited Company name just right

So you’ve decided to form your own Limited Company, congratulations! While it’s a fantastically exciting time for new employment adventures, there are a few things you’ll need to get in order before you can trade through your company, and one of them is your company name. How do you go about doing it, what’s required, and how do you check if it’s even available?

This blog looks at all the factors to consider when choosing the name to ensure that it complies with the rules set by Companies House.

 

Limited or Ltd – which one to choose?

The first thing to note is that all private Limited Companies in the UK must have either ‘Limited’ or ‘Ltd’ at the end of their name.

Beware: If you register with ‘Limited’ you can use ‘Ltd’, but if you register with ‘Ltd’ you can’t use ‘Limited’. Make sure you choose the right option.

 

What’s the right name for you and your company?

The perfect company name lets prospective clients know what you do and that you mean business. Here are a few things to consider:

  • What industry are you in, and can your company name reflect this? If you’re an IT contractor for example, portray what you do straight away to your prospective clients
  • How creative do you want to be? Would you prefer to appear serious, or stand out from the crowd with your uniqueness? Made-up words or acronyms can give an individual feel
  • Will your personal name feature in the company name? As in ‘Joe Bloggs IT Contracting Limited’ for instance
  • How will your company name sit alongside your personal marketing strategy (if you have one)?
  • Will your name reflect you as an individual, or your company?

 

Deciding what your personal and/or company image is will probably be the most difficult part of creating a name. Write a list and get an idea for what feels right to you.

Another tip would be to look at your direct competitors’ names – what do you like/dislike about them, and how will you stand out against them to your prospective client base?

 

What’s generally allowed?

As long as the name is unique there’s a wide range of choice available. Some people choose random words or phrases as they’re not intending to use the company name as a brand to trade on. If this is the case for you then you’ll probably be less concerned about what the name sounds like, which gives you even greater choice.

If you intend to incorporate the company name in your marketing strategy then just bear in mind that more often than not the most obvious choices have already been taken, so you may have to get a bit creative with it. Even if you can’t find something that you really like it’s still possible to use a ‘Trading Name’ that fits, as long as this doesn’t infringe on anyone else’s name or trademark. To do this you’ll still need to display your registered company name on all documentation and your website, but you can add something like ‘Stellar Computing Genius is a trading name of Xylo 2013 Ltd’.

If you’re professionally qualified, such as a Chartered Accountant, then you may be able to obtain permission to use this in your company name if you want to, but remember to check that the full company name remains entirely unique.

Here are a few rules and considerations every contractor must abide by:

  • The name can’t be the same (or too similar) to an existing name from the Companies House index of names. With expressed permission from the other name owner you can get around this, but this is based on exceptional circumstances only. To check if it’s already been taken, visit the Companies House website
  • Your company name can’t include a ‘sensitive’ word or expression. It also can’t imply business superiority, a particular status or specific function. For example, you can’t use the word ‘bank’, as this would need to be approved by the Financial Conduct Authority
  • National words such as ‘British’, ‘Great British’, ‘Great Britain’, ‘United Kingdom’ or ‘International’ are strictly controlled. Only Companies House will allow these based on exceptional circumstances
  • The name can’t have nor indicate any connections with the Government or local authorities
  • Be creative – but not rude! Offensive names are not permitted
  • Characters, symbols and punctuation can also be restricted

 

Beware: You may wish to call your company whatever you like, but Companies House has the power to reject any name they feel doesn’t comply with the points above. So save yourself time, effort (and potentially money) and make sure you comply to get it right first time.

 

Can you reserve a company name?

While you might know what name you’d like to use, you may not be quite ready to register your Limited Company. So what do you do? Unfortunately you can’t reserve your company name, but you can set up your Limited Company in a ‘dormant’ state.

Beware: Even though the company is dormant, your legal responsibilities as a Director are still active. Make sure you’re aware of what’s required of you while your company is dormant.

 

Can you change it further down the line?

If you want or need to change your company name you can do so in two ways:

  • Special resolution – if you change the name using a special resolution, you must file a copy of the resolution, a completed NM01 form and the appropriate fee with Companies House
  • Provision in the company’s articles – if you change the company name by means provided for in the company’s articles, you must file a NM04 form and the appropriate fee with Companies House.

 

Beware: Changing your company name through Companies House isn’t the only place you’ll have to do so. If you have social media platforms, stationery, or other mediums which carry your old name, these will all have to be changed, which can get costly. Our advice is make sure you like your name before you register it!

 

As part of Intouch’s monthly fixed fee, company incorporation is included. Our specialist team will make sure you’re eased into Limited Company ownership knowing that the name, information requirements and paperwork are fully compliant and have been appropriately filed with Companies House. Good luck!

 

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.