Have contractors just been hummed in the budget

[ClockworkCupcake]

johnfm said:

As above - he'd offset his wife and kids at £9,600 /year each for a start...

That sounds like a neat trick. Can you tell us how you legally do that please?

[Moonhawk]

ClockworkCupcake said:

That sounds like a neat trick. Can you tell us how you legally do that please?

Yep - i'd like to know that too.

I'd also like to know how my wife (who is in the high earner tax bracket) would avoid paying 40% tax on this additional income. It hardly seems worth offsetting this salary against 20% corporation tax if she is going to be taxed on it at double that rate.

[Sir Lord Poopie]

PurpleTurtle said:

Problem being that if you do that, Global Megacorp Inc has to provide those 'Plebs' the full salary and benefits package at the market rate.
Oh, and if there's enough of them they'll get smart and get unionised, nothing like a bit of collective bargaining to up the stakes in the the world of 'them' and 'us', up the workers and all that. What does Global Megacorp do to mitigate against this? It can't fire 100 skilled, hard to find workers that it needs because it will go out of business. Perhaps it will just put its prices up. Prices that Sir Lord Poople pays at the checkout. He won't mind after all, as long as those Plebs are back on PAYE.

Or, back in the actual real world, does Global Megacorp (probably with a number of MP's as non-Exec directors and 'advisors', all after a bit of ye olde Profit Maximisation) say, 'hmmm, you know what, that headline rate for Joe Contractor looks a bit high, but it's actually LESS than it would cost us to employ him long-term if we got into all that nasty business of a permanent job with security and all those unfortunate non-salary add-ons that everyone forgets about when spouting bks on the internet. Let's just offer him a contract, divide and conquer, if he gets lippy about the rate we can just terminate him and he walks. I think they call it 'the flexible labour force' these days.

Incidentally, I've never met a contractor that I would describe as a 'pleb'. However I've met plenty of deadwood permies stuck in a rut, knowing that nobody else would hire them, chained to a slowly-eroding company pension that they can't better elsewhere, but unfortunately for their employer are too costly to make redundant, despite their lack of productivity compared to motivated contractors.

For clarification I am a contractor.

[Countdown]

Moonhawk said:

The £500 a day - is that what he pays himself - or what his limited company rate is?

To pay himself £500 a day (or £130k per year based on a 5 day week) - whilst only taking minimum wage of £11,000 to avoid income tax - he'd have to be taking 119,000 out of the business as dividends. The first £5000 of these dividends is free from personal tax, but has had 20% corporation tax paid on it as dividends can only come from profit the limited company has made.

So in essence he pays himself £16,000 pa which attracts no income tax but he's still payed NI of £353 on the income and £1000 corporation tax has also been payed on the 5k dividend.

The remaining £114,000 he needs to pay himself to get him to £130k must now be paid in dividends. These are also subject to corporation tax of 20% (which works out at £22,800). Then he has to pay personal tax on the dividends as follows:

• 7.5% on any dividends that take him to the high rate tax threshold of £43k (i.e. £27k is taxed at 7.5% = £2025)
• 32.5% on dividends above the high rate tax threshold (i.e. £87,000 is taxed at 32.5% = £28,275)

So if your mate is paying himself a £500 a day salary as a combination of pay and dividends - the total amount of tax paid to do this is around £54,453

I have just put a £130k salary into this tax and NI calculator

http://www.moneysavingexpert.com/tax-calculator/

It says a permanent employee earning a salary of £130k would pay £51,533 in tax and NI.

Edited by Moonhawk on Thursday 9th March 14:29

Don't forget the expenses of having his wife doing all his admin work, the cost of commuting to and from work, the cost of his home office, and all the equipment (laptops, PC, mobile phone) plus stick the kids on the payroll while they're at Uni....

[ecs]

Moonhawk said:

BoRED S2upid said:

I have a contractor mate (IT geekery) technically taking home minimum wage but actually earning something ridiculous like £500 A DAY!

The £500 a day - is that what he pays himself - or what his limited company rate is?

To pay himself £500 a day (or £130k per year based on a 5 day week) - whilst only taking minimum wage of £11,000 to avoid income tax - he'd have to be taking 119,000 out of the business as dividends. The first £5000 of these dividends is free from personal tax, but has had 20% corporation tax paid on it as dividends can only come from profit the limited company has made.

So in essence he pays himself £16,000 pa which attracts no income tax but he's still payed NI of £353 on the income and £1000 corporation tax has also been payed on the 5k dividend.

The remaining £114,000 he needs to pay himself to get him to £130k must now be paid in dividends. These are also subject to corporation tax of 20% (which works out at £22,800). Then he has to pay personal tax on the dividends as follows:

• 7.5% on any dividends that take him to the high rate tax threshold of £43k (i.e. £27k is taxed at 7.5% = £2025)
• 32.5% on dividends above the high rate tax threshold (i.e. £87,000 is taxed at 32.5% = £28,275)

So if your mate is paying himself a £500 a day salary as a combination of pay and dividends - the total amount of tax paid to do this is around £54,453

I have just put a £130k salary into this tax and NI calculator

http://www.moneysavingexpert.com/tax-calculator/

It says a permanent employee earning a salary of £130k would pay £51,533 in tax and NI.

Edited by Moonhawk on Thursday 9th March 14:29

Don't forget the ~£20k in VAT he's collected for HMRC too

[ClockworkCupcake]

boxxob said:

those I have known are always raking it in compared to those on PAYE.

You must know them pretty well if they let you go over their accounts and their bank statements in detail.

Or do you just see them in their leased cars, and what you heard their daily rate is, then you mixed in a little bit of jealousy, added a liberal dose of the Politics of Envy, and arrived at that conclusion?

[ClockworkCupcake]

ecs said:

Don't forget the ~£20k in VAT he's collected for HMRC too

In fairness, rates are always quoted ex VAT so that's neither here nor there.

[Fastpedeller]

The grass is always greener as they say. When I was contracting I'd have happily been a PAYE permie. I had the same conversation as others "you get more etc etc" to which I just said "well give up your job and become a contractor" to the usual excuses, because the permie knew they were REALLY better off being in long-term with benefits employment. Now I'm self-employed and someone said to me (note someone who is an employee in a large company) "Oh yes, it must be good, you don't pay any tax, and you offset all the costs of your van". I was flabbergasted, but of course he didn't believe me when I said "If a self-employed person doesn't pay tax it's because they don't earn enough, or they are fiddling income. I pay tax if I earn enough, and I wouldn't fiddle the books because HMRC aren't stupid and would soon find out (they ARE the experts). As for the van, yes I can claim costs, but you must understand that all I 'get back' is the tax element of the cost, the bulk of the cost is still a cost to ME as the cost comes off the income figure before tax. Also I don't even want a van that I have to pay out for, but it's necessary for my work!
To anyone in steady, full time, with benefits employment -- I respectfully say don't feel qualified to comment on contracting or self-employment unless you've been there!

[CarlosFandango11]

swerni said:

Nope, 20% rather than the rate of income tax

You're forgetting about corporation tax...

[Moonhawk]

Countdown said:

Don't forget the expenses of having his wife doing all his admin work, the cost of commuting to and from work, the cost of his home office, and all the equipment (laptops, PC, mobile phone) plus stick the kids on the payroll while they're at Uni....

Paying your wife to do 'admin work' is not cost effective if they also work since they will be subject to tax at a higher rate than the corporation tax you are attempting to offset. And not every contractor has kids at uni nor pays them to do a non existent job.

Travel and office equipment is a legitimate business expense. As a permanent employee if I travel with work or have to purchase equipment to do the job - I would get expenses paid - also travel expenses for a contractor are no longer allowed after 18 months on the same site.

You missed off some of the costs that must be borne by the contractor. Sickness, holiday pay, pension provision, maternity/paternity leave, bonuses, share options and stability (e.g. redundancy) must all be provisioned for, whereas permanent staff get many (and in some cases all) of these 'perks' by default. How much added value do these things contribute to a permie's bottom line figure - 25%, 50%, 100%?

[pherlopolus]

ClockworkCupcake said:

johnfm said:

As above - he'd offset his wife and kids at £9,600 /year each for a start...

That sounds like a neat trick. Can you tell us how you legally do that please?

I would love to know, My wife is a 50% share holder (as befits her status as Company Secretary) but she isn't an employee as she doesn't do any work for the company.

My accountant advised against even a small salary as it just draws attention.

Edited by pherlopolus on Thursday 9th March 14:51

[johnfm]

ClockworkCupcake said:

johnfm said:

As above - he'd offset his wife and kids at £9,600 /year each for a start...

That sounds like a neat trick. Can you tell us how you legally do that please?

The same way thousands of others do it. Ask your accountant.

Then pay your wife £9k to 'do your book keeping' or whatever it is you claim she does.

It isn't a mystery and you're being disingenuous if you claim this is not widespread, common practice.

[johnfm]

pherlopolus said:

ClockworkCupcake said:

johnfm said:

As above - he'd offset his wife and kids at £9,600 /year each for a start...

That sounds like a neat trick. Can you tell us how you legally do that please?

I would love to know, My wife is a 50% share holder (as befits her status as Company Secretary) but she isn't an employee as she doesn't do any work for the company.

My account advised against even a small salary as it just draws attention.

You allocated your wife 50% shareholding? Brave come divorce proceedings.

[Countdown]

Moonhawk said:

Paying your wife to do 'admin work' is not cost effective if they also work since they will be subject to tax at a higher rate than the corporation tax you are attempting to offset. And not every contractor has kids at uni nor pays them to do a non existent job.

Assuming she's not a higer-rate earner then how will the tax she pays on her second job (@20%) exceed corporation tax (also @20%). Bear in mind she won't be paying NI on the 2nd job

Moonhawk said:

Travel and office equipment is a legitimate business expense. As a permanent employee if I travel with work or have to purchase equipment to do the job - I would get expenses paid - also travel expenses for a contractor are no longer allowed after 18 months on the same site.

Permies don't get paid travel expenses to/from their main base at all, never mind for 18 months.

Moonhawk said:

You missed off some of the costs that must be borne by the contractor. Sickness, holiday pay, pension provision, maternity/paternity leave, bonuses, share options and stability (e.g. redundancy) must all be provisioned for, whereas permanent staff get many (and in some cases all) of these 'perks' by default. How much added value do these things contribute to a permie's bottom line figure - 25%, 50%, 100%?

Agreed. it's swings and roundabouts.

[ATG]

Moonhawk said:

BoRED S2upid said:

I have a contractor mate (IT geekery) technically taking home minimum wage but actually earning something ridiculous like £500 A DAY!

The £500 a day - is that what he pays himself - or what his limited company rate is?

To pay himself £500 a day (or £130k per year based on a 5 day week) - whilst only taking minimum wage of £11,000 to avoid income tax - he'd have to be taking 119,000 out of the business as dividends. The first £5000 of these dividends is free from personal tax, but has had 20% corporation tax paid on it as dividends can only come from profit the limited company has made.

So in essence he pays himself £16,000 pa which attracts no income tax but he's still payed NI of £353 on the income and £1000 corporation tax has also been payed on the 5k dividend.

The remaining £114,000 he needs to pay himself to get him to £130k must now be paid in dividends. These are also subject to corporation tax of 20% (which works out at £22,800). Then he has to pay personal tax on the dividends as follows:

• 7.5% on any dividends that take him to the high rate tax threshold of £43k (i.e. £27k is taxed at 7.5% = £2025)
• 32.5% on dividends above the high rate tax threshold (i.e. £87,000 is taxed at 32.5% = £28,275)

So if your mate is paying himself a £500 a day salary as a combination of pay and dividends - the total amount of tax paid to do this is around £54,453

I have just put a £130k salary into this tax and NI calculator

http://www.moneysavingexpert.com/tax-calculator/

It says a permanent employee earning a salary of £130k would pay £51,533 in tax and NI.

Edited by Moonhawk on Thursday 9th March 14:29

Have you just compared a net "salary" of 130k for the contractor to a gross 130k salary for the employee?

[ClockworkCupcake]

johnfm said:

The same way thousands of others do it. Ask your accountant.

Then pay your wife £9k to 'do your book keeping' or whatever it is you claim she does.

It isn't a mystery and you're being disingenuous if you claim this is not widespread, common practice.

What you're talking about is making use of your spouse's Personal Allowance, and you're making the assumption that a) everyone is married and b) the spouse doesn't have any income of their own. In those circumstances then, yes, a degree of perfectly legal tax mitigation can be applied although it may be subject to Section 660a (aka "Income Shifting") legislation.

Edited by ClockworkCupcake on Thursday 9th March 15:01

[ClockworkCupcake]

boxxob said:

Of course, there are pro and cons, but the pros have it.

Well of course they do, otherwise you'd have to be stupid to go contracting. But the rewards aren't as huge as people seem to think they are.

The rewards are higher, but the risks are also higher. It's not for everyone, but the choice is there if you want to make it.

[ATG]

Bottom line is that the only reason contractors should end up with more money in their bank account than a permie is because they offer more flexibility to a company and are therefore providing more value to the company than a permanent member of staff. Tax shouldn't come into it. There should be no tax incentives either for the company nor the worker to choose between contracting and permanent positions.

The problem is that the tax systems for the two are so different. Unless you do something like tax dividends and income from employment the same way and move employers' NI burden to the employee, and abolish corporation tax, and don't levy VAT on transactions between companies, then there are always going to be tax arbitrages to find between contracting and permanent employment.

P.s. and scrap personal allowances and income tax banding

Edited by ATG on Thursday 9th March 15:16

[ClockworkCupcake]

ATG said:

Bottom line is that the only reason contractors should end up with more money in their bank account than a permie is because they offer more flexibility to a company and are therefore providing more value to the company than a permanent member of staff. Tax shouldn't come into it. There should be no tax incentives either for the company nor the worker to choose between contracting and permanent positions.

The problem is that the tax systems for the two are so different. Unless you do something like tax dividends and income from employment the same way and move employers' NI burden to the employee, and abolish corporation tax, and don't levy VAT on transactions between companies, then there are always going to be tax arbitrages to find between contracting and permanent employment.

True.

[pherlopolus]

johnfm said:

You allocated your wife 50% shareholding? Brave come divorce proceedings.

Only if you plan on getting divorced.