Redundancy to avoid tax .. option?
Discussion
Chaps,
I am currently self-employed as a contractor.
I start a regular, employed job a week today.
My company year end was at the end of May, and I have to do the accounts. Obviously, I want to avoid as much tax as possible.
A friend has suggested that I should make myself redundant from my company in order to avoid paying tax. Apparently, redundany payments are tax-free for both the company (being treated as an expense), and income tax free as well.
Is this so? Is this a viable option for a means of getting money out of the company? I am unlikely to want to use it again, certainly not in the forseeable future.
If I am to do this, how do I do it? List "Redundancy Payment" in the accounts, presumably, but where do I list it in the CT return, and where in the personal tax return? (Note, I don't have an accountant.)
Oli.
I am currently self-employed as a contractor.
I start a regular, employed job a week today.
My company year end was at the end of May, and I have to do the accounts. Obviously, I want to avoid as much tax as possible.
A friend has suggested that I should make myself redundant from my company in order to avoid paying tax. Apparently, redundany payments are tax-free for both the company (being treated as an expense), and income tax free as well.
Is this so? Is this a viable option for a means of getting money out of the company? I am unlikely to want to use it again, certainly not in the forseeable future.
If I am to do this, how do I do it? List "Redundancy Payment" in the accounts, presumably, but where do I list it in the CT return, and where in the personal tax return? (Note, I don't have an accountant.)
Oli.
Are you Self Employed or the director of your own limited company? Whatever it is will make huge difference to whether you can obtain "redundancy".
In any case, the general principle is that redundancy payments are no different to normal salary, and are subject to PAYE and Class 1 National Insurance in the normal way.
However, there is provision to allow an employee or officer of a company to receive an "ex-gratia" or "compensation for loss of office" payment which could be tax and NI free provided it is
a) under £30,000
b) NOT a redundancy payment
c) not a payment in respect of emplyment services rendered, past or future.
Genuine self employed individuals are not taxed under PAYE so none of the usual "redundancy" or "compensation for loss of office" rules apply.
>> Edited by Eric Mc on Monday 11th July 17:58
In any case, the general principle is that redundancy payments are no different to normal salary, and are subject to PAYE and Class 1 National Insurance in the normal way.
However, there is provision to allow an employee or officer of a company to receive an "ex-gratia" or "compensation for loss of office" payment which could be tax and NI free provided it is
a) under £30,000
b) NOT a redundancy payment
c) not a payment in respect of emplyment services rendered, past or future.
Genuine self employed individuals are not taxed under PAYE so none of the usual "redundancy" or "compensation for loss of office" rules apply.
>> Edited by Eric Mc on Monday 11th July 17:58
Eric,
Thanks for replying.
I am a director of my own small company. Does this therefore mean that I could do the route you suggested ("Ex Gratia Payment"
, and pocket £30k tax-free? (It would be excellent if I could, as the tax is payable in the next few months, and I have - predictably - spent it!)
Oli.
Thanks for replying.
I am a director of my own small company. Does this therefore mean that I could do the route you suggested ("Ex Gratia Payment"
, and pocket £30k tax-free? (It would be excellent if I could, as the tax is payable in the next few months, and I have - predictably - spent it!) Oli.
Eric Mc said:
In any case, the general principle is that redundancy payments are no different to normal salary, and are subject to PAYE and Class 1 National Insurance in the normal way.
Eric..I'm not an expert, but aren't statutory redundancy payments normally made free of tax & NI?
Eric Mc said:
However, there is provision to allow an employee or officer of a company to receive an "ex-gratia" or "compensation for loss of office" payment which could be tax and NI free provided it is
a) under £30,000
b) NOT a redundancy payment
c) not a payment in respect of emplyment services rendered, past or future.
...and not contractual (I believe)
I thought statutory redundancy was taxable in the normal way. I may be wrong though.
The "£30,000" ex-gratia route is frought with dangers, especially when the owner of the company (the shareholder) and the former director of the company are one and the same person. The Inland Revenue might spot a hint of artificiality about the arrangement and block it. Of course, as the responsibility for declaring such payments are all down to the directors of the company (under PAYE rules) or the director as an individual (under Self Assessment rules), failure to declare exactly what the payment really is and the circumstances under which ity has been paid leaves you terribly vulnerable to the Revenue coming down on you like a ton of bricks.
If you've already had the cash before any sort of arrangement was made, there is no way that the Inland Revenue would consider that an ex-gratia payment.
The "£30,000" ex-gratia route is frought with dangers, especially when the owner of the company (the shareholder) and the former director of the company are one and the same person. The Inland Revenue might spot a hint of artificiality about the arrangement and block it. Of course, as the responsibility for declaring such payments are all down to the directors of the company (under PAYE rules) or the director as an individual (under Self Assessment rules), failure to declare exactly what the payment really is and the circumstances under which ity has been paid leaves you terribly vulnerable to the Revenue coming down on you like a ton of bricks.
If you've already had the cash before any sort of arrangement was made, there is no way that the Inland Revenue would consider that an ex-gratia payment.
From DTI web site:
You will not pay income tax on a statutory redundancy payment though other redundancy payments you receive from your employer may be taxable - see Inland Revenue booklet Income tax and redundancy: a guide to tax and National Insurance Contributions IR143. Normally your employer may set the payments against tax as business expense (for further details, see the Inspectors manual - or after mid-2003 the Business income manual - in the Publications section of the Inland revenue website.
You will not pay income tax on a statutory redundancy payment though other redundancy payments you receive from your employer may be taxable - see Inland Revenue booklet Income tax and redundancy: a guide to tax and National Insurance Contributions IR143. Normally your employer may set the payments against tax as business expense (for further details, see the Inspectors manual - or after mid-2003 the Business income manual - in the Publications section of the Inland revenue website.
2 Smokin Barrels said:
From DTI web site:
You will not pay income tax on a statutory redundancy payment though other redundancy payments you receive from your employer may be taxable - see Inland Revenue booklet Income tax and redundancy: a guide to tax and National Insurance Contributions IR143. Normally your employer may set the payments against tax as business expense (for further details, see the Inspectors manual - or after mid-2003 the Business income manual - in the Publications section of the Inland revenue website.
My missus is just doing this now for some unfortunate staff. Statutory redundancy is tax free but the bonus they get for staying until the dept closes is taxable.
Chaps,
All good input - thanks.
Therefore, what am I best advised to do? The Ex Gratia route is being suggested as more than a little iffy, therefore is the redundancy option a possible one?
Alternatively, what are other good ways of getting money out of a company without paying tax on it - legally, of course. (Avoidance not evasion etc).
Also, the comment is made about the Ex Gratia route looking iffier still if the payment has already been made. As a small company I am not obliged to show a cash flow statement (and indeed I'm not sure if I am obliged to have a seperate company bank account, although I do.) Given these circumstances, how would they know that the money has already been paid?
Oli.
All good input - thanks.
Therefore, what am I best advised to do? The Ex Gratia route is being suggested as more than a little iffy, therefore is the redundancy option a possible one?
Alternatively, what are other good ways of getting money out of a company without paying tax on it - legally, of course. (Avoidance not evasion etc).
Also, the comment is made about the Ex Gratia route looking iffier still if the payment has already been made. As a small company I am not obliged to show a cash flow statement (and indeed I'm not sure if I am obliged to have a seperate company bank account, although I do.) Given these circumstances, how would they know that the money has already been paid?
Oli.
Corporation Tax Self Assessment legally requires that the directors of the company are duty bound to disclose to the Inland Revenue all the factors relating to the nature of the payments made by the company. Waiting for the Inland Revenue to "find out" is no excuse and can lead to a much worse situation if and when they do.
How would you show the "cost" in the company's profit and loss account?
How would you disclose the nature of the payment in the notes to the account as is required under Companies Act disclosure rules?
Payments to directors HAVE to be disclosed in the notes to the accounts no matter what form those payments take.
How would you show the "cost" in the company's profit and loss account?
How would you disclose the nature of the payment in the notes to the account as is required under Companies Act disclosure rules?
Payments to directors HAVE to be disclosed in the notes to the accounts no matter what form those payments take.
Eric,
You are right - I guess I need to be quite clear that I am not looking to evade tax, just avoid it, wherever I can, legally.
Given this, is there any avoidance possible here, or would you suggest that really my best option is simply to take the income for the year as dividends (as I usually do) and bite the bullet for the tax as it stands?
Oli.
You are right - I guess I need to be quite clear that I am not looking to evade tax, just avoid it, wherever I can, legally.
Given this, is there any avoidance possible here, or would you suggest that really my best option is simply to take the income for the year as dividends (as I usually do) and bite the bullet for the tax as it stands?
Oli.
I've just gone down the redundancy route as advised by my accountant. Two of his other clients have done the same over the last couple of years and have had no IR comeback. I had more than 30k in the company, but also reduced tax by claiming 2 years worth of taper relief on my shareholding. This works out as another 16k tax free.
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