Tax efficient second income
Discussion
I've got a second income stream about to open up from some consultancy / development work I have carried out. This income is going to be regular and will involve little or no additional work from me as I've done the development work.
I already have a "day job" that puts me in Gordon Brown's "rob him 'cos he works hard" tax bracket meaning the second income will all be at higher rate.
Other than having the cheques made out to the missus - who isn't higher rate taxpayer - is there a more tax efficient way of banking this extra income into the 993 savings fund ?
Any advice welcome.
I already have a "day job" that puts me in Gordon Brown's "rob him 'cos he works hard" tax bracket meaning the second income will all be at higher rate.
Other than having the cheques made out to the missus - who isn't higher rate taxpayer - is there a more tax efficient way of banking this extra income into the 993 savings fund ?
Any advice welcome.
You can't DEEM income atributable to you as being payable to someone else - that is called a "Settlement" and is blocked under the provisions of Section 660 Income Taxes Act.
How is this income being generated - a second job, an investment of some sort, a captal gain or series of capital gains?
How is this income being generated - a second job, an investment of some sort, a captal gain or series of capital gains?
Are you a co director or a co-shareholder in this company?
In what guise did he plan to pay the money to you - salary?
Does he want the copmpany to obtain tax relief for the payments it makes to you?
You cannot distribute "profits" of a limited company to an individual who is not a "formal" shareholder in that company.
In what guise did he plan to pay the money to you - salary?
Does he want the copmpany to obtain tax relief for the payments it makes to you?
You cannot distribute "profits" of a limited company to an individual who is not a "formal" shareholder in that company.
Eric Mc said:
Are you a co director or a co-shareholder in this company?
In what guise did he plan to pay the money to you - salary?
Does he want the copmpany to obtain tax relief for the payments it makes to you?
You cannot distribute "profits" of a limited company to an individual who is not a "formal" shareholder in that company.
Eric, could he not set up his own limited company which bills the main company and then draw the money as a dividend, hence effectively reducing tax to 19%. I am guessing however that this might come into classic IR35 territory though as the ltd co. would only have 1 client?
Prof Higgins said:No, that's way out of IR35 country. He isn't selling time, there is no way he could be construed to be a disguised employee. Not even remotely liable under IR35. WHat would e be billing for though?
Are you a co director or a co-shareholder in this company?
In what guise did he plan to pay the money to you - salary?
Does he want the copmpany to obtain tax relief for the payments it makes to you?
You cannot distribute "profits" of a limited company to an individual who is not a "formal" shareholder in that company.
Eric, could he not set up his own limited company which bills the main company and then draw the money as a dividend, hence effectively reducing tax to 19%. I am guessing however that this might come into classic IR35 territory though as the ltd co. would only have 1 client?
Right - starting to go over my head chaps !!
To clarify (I think) :-
- I'm not a shareholder, director or employee of the company using my software.
- I've not been asked to produce invoices at all.
- Only documentation in place is an agreement that the company will have use of my software,that I will be kept informed of the terms under which it is used i.e. how much each customer is paying for the reports generated by the software, and that I will receive half of the profits generated.
>> Edited by semprini27 on Tuesday 1st November 11:18
To clarify (I think) :-
- I'm not a shareholder, director or employee of the company using my software.
- I've not been asked to produce invoices at all.
- Only documentation in place is an agreement that the company will have use of my software,that I will be kept informed of the terms under which it is used i.e. how much each customer is paying for the reports generated by the software, and that I will receive half of the profits generated.
>> Edited by semprini27 on Tuesday 1st November 11:18
Could I set up a ltd company of my own and bill my mate for a licensing fee for my software ?
If so, is there any problem with him telling me how much the invoice should be for as it depends on him sharing commercial info with me, i.e. how much he is billing / how much of that is profit etc.
If so, is there any problem with him telling me how much the invoice should be for as it depends on him sharing commercial info with me, i.e. how much he is billing / how much of that is profit etc.
Yes that it basically it. Your company then pays corporation tax on this profit at 19% and you can draw the sum back out as a dividend tax free. You have to cost in however the admin charge of setting up and running a limited company (albeit a very simple one), you will need to submit returns to the revenue and have an accountant etc so you will need the taxation benefits to outweigh these costs.
As far as your mate telling you how much to bill, I cannot see a problem as long as you trust him not to rip you off. We have a setup with one of our clients where we receive a commission kickback from business we passed onto them. It is based on trust, but once in a while they tell us how much business the other client has done with them and how much our share is and we produce an invoice to that amount.
Only problem I saw was falling foul of IR35 which was basically a rule to stop certain people (contractors) selling their services under the banner of a company with the sole intention of paying less tax and NI when they were to all intents and purposes and employee as only working for 1 client. VictorM above says that this is not relevant in this case however as you are selling usage of a product and not your own services so sounds like jobs a goodun.... am sure Eric will be back shortly to blow a big whole in the side of this though with a really obvious reason why it cannot work
As far as your mate telling you how much to bill, I cannot see a problem as long as you trust him not to rip you off. We have a setup with one of our clients where we receive a commission kickback from business we passed onto them. It is based on trust, but once in a while they tell us how much business the other client has done with them and how much our share is and we produce an invoice to that amount.
Only problem I saw was falling foul of IR35 which was basically a rule to stop certain people (contractors) selling their services under the banner of a company with the sole intention of paying less tax and NI when they were to all intents and purposes and employee as only working for 1 client. VictorM above says that this is not relevant in this case however as you are selling usage of a product and not your own services so sounds like jobs a goodun.... am sure Eric will be back shortly to blow a big whole in the side of this though with a really obvious reason why it cannot work
So, I've been doing some reading on setting up a ltd company and paying myself a dividend. To check my understanding :-
- Dividend will attract 19% corp tax
- I will pay 22.5 % Income Tax on the dividend
- tax liability in total is greater than just taking it on the chin and having extra income at 40% without the work and costs of running a ltd company.
??
>> Edited by semprini27 on Tuesday 1st November 14:58
- Dividend will attract 19% corp tax
- I will pay 22.5 % Income Tax on the dividend
- tax liability in total is greater than just taking it on the chin and having extra income at 40% without the work and costs of running a ltd company.
??
>> Edited by semprini27 on Tuesday 1st November 14:58
semprini27 said:
I've got a second income stream about to open up from some consultancy / development work I have carried out. This income is going to be regular and will involve little or no additional work from me as I've done the development work.
I already have a "day job" that puts me in Gordon Brown's "rob him 'cos he works hard" tax bracket meaning the second income will all be at higher rate.
Other than having the cheques made out to the missus - who isn't higher rate taxpayer - is there a more tax efficient way of banking this extra income into the 993 savings fund ?
Any advice welcome.
Long shot - but does your wife work? If not, can she do the work (or some of it at least)? You could then utilise her tax threshold.
Edited to say: Of course I'm presuming you're married, you might not be!
>> Edited by srebbe64 on Tuesday 1st November 14:56
srebbe64 said:
Long shot - but does your wife work? If not, can she do the work (or some of it at least)? You could then utilise her tax threshold.
Edited to say: Of course I'm presuming you're married, you might not be!
>> Edited by srebbe64 on Tuesday 1st November 14:56
My wife does work and is, indeed, married to me !!
She is part time so doesn't reach the higher rate. My initial thought was to have the cheques paid to her until such a time as she too hits 40%.
There is no regular work involved for me as I have developed the software and handed it over. There's the occasional update when I'm tinkering or if a client requests a specific amendment so I suppose I could claim that my wife is doing this work ?
semprini27 said:
Long shot - but does your wife work? If not, can she do the work (or some of it at least)? You could then utilise her tax threshold.
Edited to say: Of course I'm presuming you're married, you might not be!
>> Edited by srebbe64 on Tuesday 1st November 14:56
My wife does work and is, indeed, married to me !!
She is part time so doesn't reach the higher rate. My initial thought was to have the cheques paid to her until such a time as she too hits 40%.
There is no regular work involved for me as I have developed the software and handed it over. There's the occasional update when I'm tinkering or if a client requests a specific amendment so I suppose I could claim that my wife is doing this work ?
I think you'd be wise to make it more than a "claim". Are there some administrative bits and bobs she can do that would take a few hours a week?
As a rule of thumb, I reckon it's a good discipline to assume that in 12 months time the Inland Revenue are going to audit you and the wife. As such, keep a work log of all that she's done.
semprini27 said:
So, I've been doing some reading on setting up a ltd company and paying myself a dividend. To check my understanding :-
- Dividend will attract 19% corp tax
- I will pay 22.5 % Income Tax on the dividend
- tax liability in total is greater than just taking it on the chin and having extra income at 40% without the work and costs of running a ltd company.
??
>> Edited by semprini27 on Tuesday 1st November 14:58
Hmmn, yes had forgotton about your original source of income already taking you into higher rate tax rather than new income taking you over the threshild. For me it is worthwhile as a Director to pay myself a very small "salary" of a few thousand hence being a low rate tax payer and then the dividend can be taken free of further tax - you have no realistic control over the amount you earn from your first source (unless you offer to take a pay cut
) so you are liable, as you say, to paying tax on the dividend.... wife may be the better option but maybe still wrth setting it up as a Ltd company with both of you named as directors, she can then draw the divi tax free. Seems like either way we are putting off the inevitable - when income from various sources takes her over the 40% band then that's what we'll both be paying ....
May get a bit extra in the short term but likelihood is it'll be 40% sooner rather than later on the additional income.
Any other benefits to setting up as a ltd company ?
May get a bit extra in the short term but likelihood is it'll be 40% sooner rather than later on the additional income.
Any other benefits to setting up as a ltd company ?
Need to watch out for IR591 too...
See www.bytestart.co.uk/content/IR35/27_1/ir591-small-business-tax.shtml
All about taking divis from small companies...
See www.bytestart.co.uk/content/IR35/27_1/ir591-small-business-tax.shtml
All about taking divis from small companies...
Beware of Section 660.
You cannot just "allocate" YOUR earnings to your wife and expect the Inland Revenue to accept that she has really "earned" this money herself. There is a very important tax case going through the courts on this very issue (The Arctic Systems case). Do a Google and read up on what happens when someone tries to split their income.
Setting up your own Limited Company to obtain the income that way is a possibilty and based on what you are saying, it may very well be outside the scope of IR35. However, if the agreement (verbal or otherwise) for your payments is currently in respect of your personally, you would have to rewrite or redraft the agreement so that it is in respect of your company.
The situation regarding taxation is as follows:
Companies pay Corporartion Tax of 19% on profits over £10,000
If dividends are paid, a company pays tax at 19% on the dividend, even if teh company's profits do not exceed the £10,000 threshold.
Individuals receive dividends net of a deemed notional amount of income tax tax calculated at 10%.
Individuals do not have to pay any personal income tax on dividends received unless their overall income from all sources in the tax year exceeds the Higher Rate Threshold. Even though the higher rate of tax is normally 40%, Higher Rate Tax is calculated on dividends at 32.50%
Dividends do not give rise to any National Insuranbce Liability.
There are strict companies acts regulations governing dividends payments. Directors who pay themselves excess dividends may be prosecuted and WILL have to poay a tax penalty calculated at 20% of the excess dividend.
You cannot just "allocate" YOUR earnings to your wife and expect the Inland Revenue to accept that she has really "earned" this money herself. There is a very important tax case going through the courts on this very issue (The Arctic Systems case). Do a Google and read up on what happens when someone tries to split their income.
Setting up your own Limited Company to obtain the income that way is a possibilty and based on what you are saying, it may very well be outside the scope of IR35. However, if the agreement (verbal or otherwise) for your payments is currently in respect of your personally, you would have to rewrite or redraft the agreement so that it is in respect of your company.
The situation regarding taxation is as follows:
Companies pay Corporartion Tax of 19% on profits over £10,000
If dividends are paid, a company pays tax at 19% on the dividend, even if teh company's profits do not exceed the £10,000 threshold.
Individuals receive dividends net of a deemed notional amount of income tax tax calculated at 10%.
Individuals do not have to pay any personal income tax on dividends received unless their overall income from all sources in the tax year exceeds the Higher Rate Threshold. Even though the higher rate of tax is normally 40%, Higher Rate Tax is calculated on dividends at 32.50%
Dividends do not give rise to any National Insuranbce Liability.
There are strict companies acts regulations governing dividends payments. Directors who pay themselves excess dividends may be prosecuted and WILL have to poay a tax penalty calculated at 20% of the excess dividend.
Eric Mc said:
Beware of Section 660.
You cannot just "allocate" YOUR earnings to your wife and expect the Inland Revenue to accept that she has really "earned" this money herself.
Agreed, but if his missus is genuinely working (admin and stuff) and he has records and documented this, then surely there's no problem.
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