Have contractors just been hummed in the budget
Discussion
ClockworkCupcake said:
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. 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.
Rates can and do drift +/- £100 a day depending on company/location, and I would like to continue to have the flexibility to undertake work that is interesting, rather than local.
ATG said:
Have you just compared a net "salary" of 130k for the contractor to a gross 130k salary for the employee?
The guy said his IT mate pays himself £500 a day - so in my calculations I have assumed this is gross salary and equates to around £130k per year.For the contractor to be able to pay himself £500 a day net (i.e. actually take home £500 a day) - the tax figures would even higher.
Countdown said:
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
Even if she's not a high rate tax payer - it still doesn't seem worth it, since she will be getting taxed at the same rate as corporation tax - so the net benefit is zero (you are simply replacing one 20% tax rate with another).The only time it would be beneficial was if the wife did not work - and therefore the salary was being paid essentially tax free.
It seems to me the government could fix this problem instantly by creating a new type of tax entity for PSCs and applying a tax system specific to that entity.
People operating through PSCs could continue to do so without the annoyances of employment, continue to receive a fair market rate and there would be no more moaning about tax dodging.
Extra bonus, no more IR35 necessary.
People operating through PSCs could continue to do so without the annoyances of employment, continue to receive a fair market rate and there would be no more moaning about tax dodging.
Extra bonus, no more IR35 necessary.
Gargamel said:
Contracting has largely been a massive tax dodge anyway, so I tend to think this is levelling it up a little more against PAYE.
I have done both, so no axe to grind, however some folks have been independent contractors for multiple years... at the same firm doing the same role.
also done I have done both, so no axe to grind, however some folks have been independent contractors for multiple years... at the same firm doing the same role.
spot on. I've also done both and likewise, no axe to grind. ATG said:
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)
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
LeighW said:
The earned salary is correct, tax on £130k gross is £51533, but as a one man band director/shareholder, the most tax efficient way would be to take a salary to the max before paying any NIC (whilst still protecting your pension rights), so £8052 PA, then the balance as dividends. Assuming you took all of the profits after corp tax out of the company, you'd pay £24389.60 in corp tax, then £23284.88 personal tax, totalling £47674.48.
I can't get close to your figure for personal tax.If the guy took £8,052 as salary in order to avoid both tax and NI - that would mean they would need to take £121,948 as dividends to make up the £130k gross
The first £5k in dividends is tax free - but that would take their income to £13,052 which is above the low tax rate threshold.
The next £29,948 in dividends would therefore be taxed at 7.5% = £2,246 which would take them up to the £43k high rate tax threshold.
As their income is now above the high rate tax threshold, the remaining £87,000 in dividends would be taxed at 32.5% = £28,275
So their total personal tax liability is £30,521 on all of the dividends. Add this to the £24,389 already paid in corporation tax on the profit the dividend has come out of and it takes the total tax liability up to £54,910 for that income.
LeighW said:
The earned salary is correct, tax on £130k gross is £51533, but as a one man band director/shareholder, the most tax efficient way would be to take a salary to the max before paying any NIC (whilst still protecting your pension rights), so £8052 PA, then the balance as dividends. Assuming you took all of the profits after corp tax out of the company, you'd pay £24389.60 in corp tax, then £23284.88 personal tax, totalling £47674.48.
Don't forget to deduct business expenses like an accountant, Insurances (Professional Indemnity, Public Liability, etc.), and other company overheads. Not a vast amount, I know, but non-zero. Oh, and Employers National Insurance contributions. And they are definitely non-zero!
It's swings and roundabouts.
Moonhawk said:
Employers NI would be zero on a salary of £8052.
I believe that HMRC take a fairly dim view of setting your salary that low though. Certainly my squeaky-clean accountant has always advised a higher salary than that, which means there is Employers NI to pay, but fair enough. ClockworkCupcake said:
Moonhawk said:
Employers NI would be zero on a salary of £8052.
I believe that HMRC take a fairly dim view of setting your salary that low though. Certainly my squeaky-clean accountant has always advised a higher salary than that, which means there is Employers NI to pay, but fair enough. I suspect not having to pay employers NI is one of the reasons many companies seem keen to keep contractors on long term.
Perhaps that is a loophole the government need to look at - stop companies using contractors as de-facto permanent employees.
Edited by Moonhawk on Thursday 9th March 17:47
I've dealt with a decent number of interim execs (short term gap fill/turnaround types) and the general rule in that market was c 0.9-1.1% of 'normal' basic annual salary per day.
So if you would have paid c £150k per annum for a FD then the day rate would be around £1000-1500. A perm employee on £150k basic would easily cost the company £250k, and that is without taking into account any long term incentive plans (normally share based plans paying out over 3-5 years), and with an average bonus.
Most interims would probably work 200-220 days a year, so the total cost to the business is not hugely different, especially when the flexibility and opportunity cost are factored in.
This is a slightly different market, I appreciate
So if you would have paid c £150k per annum for a FD then the day rate would be around £1000-1500. A perm employee on £150k basic would easily cost the company £250k, and that is without taking into account any long term incentive plans (normally share based plans paying out over 3-5 years), and with an average bonus.
Most interims would probably work 200-220 days a year, so the total cost to the business is not hugely different, especially when the flexibility and opportunity cost are factored in.
This is a slightly different market, I appreciate
All this talk of extra tax due to the NI and dividend tax change is small change in any case compared to the loss from the flat rate VAT scheme which comes into affect next month. That's several thousand pounds down the drain for most contractors I'd guess and these other changes are just the icing on the cake.
cerbfan said:
All this talk of extra tax due to the NI and dividend tax change is small change in any case compared to the loss from the flat rate VAT scheme which comes into affect next month. That's several thousand pounds down the drain for most contractors I'd guess and these other changes are just the icing on the cake.
Yep. They really are on a mission.cerbfan said:
All this talk of extra tax due to the NI and dividend tax change is small change in any case compared to the loss from the flat rate VAT scheme which comes into affect next month. That's several thousand pounds down the drain for most contractors I'd guess and these other changes are just the icing on the cake.
Not really.Most of the contractors who will be affected by this will likely be on a flat rate of 14.5% anyway - so it's only an increase of 2% above what they pay now.
For a contractor whose rate is around the £50 an hour mark - this will mean a loss of VAT revenue of around £300 per year.
Edited by Moonhawk on Thursday 9th March 21:49
Afraid not, if you turnover £100k a year + vat at 14.5% you pay back £17,400 of the £20k in vat you collect. At 16.5% you pay back £19,800 of the £20k therefore your income has gone down by £2,400.
Worrying how many people do not seem to know whats going on with flat rate VAT seeing the change takes place on the 1st of April.
Worrying how many people do not seem to know whats going on with flat rate VAT seeing the change takes place on the 1st of April.
Moonhawk said:
LeighW said:
The earned salary is correct, tax on £130k gross is £51533, but as a one man band director/shareholder, the most tax efficient way would be to take a salary to the max before paying any NIC (whilst still protecting your pension rights), so £8052 PA, then the balance as dividends. Assuming you took all of the profits after corp tax out of the company, you'd pay £24389.60 in corp tax, then £23284.88 personal tax, totalling £47674.48.
I can't get close to your figure for personal tax.If the guy took £8,052 as salary in order to avoid both tax and NI - that would mean they would need to take £121,948 as dividends to make up the £130k gross
The first £5k in dividends is tax free - but that would take their income to £13,052 which is above the low tax rate threshold.
The next £29,948 in dividends would therefore be taxed at 7.5% = £2,246 which would take them up to the £43k high rate tax threshold.
As their income is now above the high rate tax threshold, the remaining £87,000 in dividends would be taxed at 32.5% = £28,275
So their total personal tax liability is £30,521 on all of the dividends. Add this to the £24,389 already paid in corporation tax on the profit the dividend has come out of and it takes the total tax liability up to £54,910 for that income.
So total personal income = £8052 salary plus £97558 divis = £105610.
Income greater than £100k, so personal allowance reduced to £8195. Taxable therefore = £105610 less £8195 = £97415
Personal tax therefore =
£5000 @ 0% = £0.00
£27000 @ 7.5% = £2025.00
£65415 @ 32.5% = £21259.88
Total personal tax = £23284.88, add corp tax £24389.60, total tax £47674.48.
Punch the personal income figures in here if you like (allow for slight rounding diffs):
http://www.contractorcalculator.co.uk/dividend_tax...
cerbfan said:
Afraid not, if you turnover £100k a year + vat at 14.5% you pay back £17,400 of the £20k in vat you collect. At 16.5% you pay back £19,800 of the £20k therefore your income has gone down by £2,400.
Worrying how many people do not seem to know whats going on with flat rate VAT seeing the change takes place on the 1st of April.
I concede I made an error in my calculations.Worrying how many people do not seem to know whats going on with flat rate VAT seeing the change takes place on the 1st of April.
The fact of the matter is though - it's the limited company revenue that is affected, not the contractors pay. There is no reason that the contractor would be worse off as a result.
The contractor can still pay themselves the same income as long as the limited company itself is still in profit.
I didn't know about the changes to the flat rate scheme - but then again my company is currently in dormancy as I have been in permanent employment. I'm sure my accountant would have made me aware when it became pertinent - however, given the changes are happening regardless, all I really need to know is how much HMRC are expecting so that I can pay it. Ultimately there is nothing I can do about is - and I don't run my company so close to the wire that a £2k change in revenue would sink it.
I treat the difference in VAT collected vs flat rate as a bonus anyway - I don't rely on it.
Edited by Moonhawk on Thursday 9th March 22:11
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