IR35 and Umbrella Companies Confused

IR35 and Umbrella Companies Confused

Author
Discussion

Deep Thought

35,724 posts

196 months

Sunday 22nd December 2019
quotequote all
Wilmslowboy said:
mmm-five said:
….

They're all spending the next 3 months trying to negotiate daily rate rises in the 30% range to offset the extra tax, employee NI and employer NI they'll have to pay on their weekly wage vs the 'low wages' they seem to all seem to currently take out of the company.
As someone that has worked both as a contractor and permie, the real world difference is more like 10% (once corp tax, accounting fees and dividend (paye) tax is taken into account) I know there are 'better ways' in the ltd company world to pay even less tax (loan anyone) but I like to sleep at night.

The big uplift for most contractor is the fact they go from earning lets say £1,200 a week as a pemie (less payee) to closer to £2.5k a week.

My experience is in the IT contract world.
Well it would be if you didnt then have to pay Employers National Insurance out of your day rate which amounts to approx 14%, taking your total difference to around 25%.



Deep Thought

35,724 posts

196 months

Sunday 22nd December 2019
quotequote all
Dr Jekyll said:
Wilmslowboy said:
The big uplift for most contractor is the fact they go from earning lets say £1,200 a week as a pemie (less payee) to closer to £2.5k a week.

My experience is in the IT contract world.
What skill set is that?
Most IT Contractors would be seeing that sort of variance. A £60K pa permie job role would get around £500 a day on a contract rate.


Deep Thought

35,724 posts

196 months

Sunday 22nd December 2019
quotequote all
essayer said:
They go from earning £1200 a week to working for a their own limited company charging them out at £2500 a week - out of which the company has to pay corporation tax, a pension, holidays, sick pay, medical insurance, and so on.
Certainly not doubling the income!
Its probably easily doubling the net income. A contract getting £2,500 a week and billing 45 weeks a year is going to be bringing around £112,000 in to their limited company.

They'll pay themselves a minimal wage, take the rest as dividends.

£60K PAYE nets you £3,611 a month.

A contractor on £500 a day and working 45 weeks a year would be doing something badly wrong if they werent able to pull £7,000 a month out of the business

Even allowing another £800 a month for "contributions" you want to make (which would be tax deductable anyway), pulling £6,200 out of the business monthly is the equivalent of a £120,000 a year PAYE job.

Edited by Deep Thought on Sunday 22 December 19:47


Edited by Deep Thought on Sunday 22 December 19:48

Wilmslowboy

4,189 posts

205 months

Monday 23rd December 2019
quotequote all
Deep Thought said:
Its probably easily doubling the net income. A contract getting £2,500 a week and billing 45 weeks a year is going to be bringing around £112,000 in to their limited company.

They'll pay themselves a minimal wage, take the rest as dividends.

£60K PAYE nets you £3,611 a month.

A contractor on £500 a day and working 45 weeks a year would be doing something badly wrong if they werent able to pull £7,000 a month out of the business

Even allowing another £800 a month for "contributions" you want to make (which would be tax deductable anyway), pulling £6,200 out of the business monthly is the equivalent of a £120,000 a year PAYE job.
Saved me answering - thanks thumbup

Deep Thought

35,724 posts

196 months

Monday 23rd December 2019
quotequote all
biggrin
Wilmslowboy said:
Deep Thought said:
Its probably easily doubling the net income. A contract getting £2,500 a week and billing 45 weeks a year is going to be bringing around £112,000 in to their limited company.

They'll pay themselves a minimal wage, take the rest as dividends.

£60K PAYE nets you £3,611 a month.

A contractor on £500 a day and working 45 weeks a year would be doing something badly wrong if they werent able to pull £7,000 a month out of the business

Even allowing another £800 a month for "contributions" you want to make (which would be tax deductable anyway), pulling £6,200 out of the business monthly is the equivalent of a £120,000 a year PAYE job.
Saved me answering - thanks thumbup
bowtie

biggrin


essayer

9,011 posts

193 months

Monday 23rd December 2019
quotequote all
It’s decent but £7k? Unlikely

£112000 gross
-£500pa on an accountant
-£500pa for accounting software
-£10k for direct contribs to SIPP etc
-£1k for some expenses

£100k net
-£20k Corp Tax

£80k profit

Paid entirely as salary / dividends means £12k personal tax payable

£68k net income
= £5666/month

I’ve been both sides of the fence and at some point it’s not just about money.

A decent employer will probably put in 8% toward a pension, maybe a discretionary bonus, paid training, sick pay etc etc - career advancement - and it doesn’t take a massive jump, a month spent looking for work or a period of sickness to even things out. Also in year two remember HMRC will want next year’s tax bill in paid advance..

Tread carefully!

Wildfire

Original Poster:

9,774 posts

251 months

Monday 23rd December 2019
quotequote all
Thanks everyone, my first port of call is to get out of my current perm role as "sympathetic and considerate" they are not.

Next priority is to sort out the rate and then just get working. I'll be giving a few umbrella companies a ring come exit, whilst keeping my options open. At the moment, ease of life and less stress is the way forward for me.

Eric Mc

121,782 posts

264 months

Monday 23rd December 2019
quotequote all
essayer said:
It’s decent but £7k? Unlikely

Also in year two remember HMRC will want next year’s tax bill in paid advance..

Tread carefully!
You might need to explain what you mean by that.

Deep Thought

35,724 posts

196 months

Monday 23rd December 2019
quotequote all
essayer said:
It’s decent but £7k? Unlikely

£112000 gross
-£500pa on an accountant
-£500pa for accounting software
-£10k for direct contribs to SIPP etc
-£1k for some expenses

[b]£100k net
-£20k Corp Tax[/b]

£80k profit

Paid entirely as salary / dividends means £12k personal tax payable

£68k net income
= £5666/month

I’ve been both sides of the fence and at some point it’s not just about money.

A decent employer will probably put in 8% toward a pension, maybe a discretionary bonus, paid training, sick pay etc etc - career advancement - and it doesn’t take a massive jump, a month spent looking for work or a period of sickness to even things out. Also in year two remember HMRC will want next year’s tax bill in paid advance..

Tread carefully!
You've missed any other deductables that can be made, including direct and indirect expenses and the basic tax band allowance of £12,500 before paying tax. Factor that in and any other deductables and you're back to around £6,200 again, which brings you back to a PAYE salary of £112,000 or so.

And yes, absolutely, i dont do it solely for the money - i do it not to have to have maybe 100+ people reporting to me, a multi £million budget to negotiate and balance, senior management breathing down my neck, strategic objectives to meet for the business, office politics to negotiate, etc, etc, ad nauseam that people on £100K+ salaries seem to have to endure.



Edited by Deep Thought on Monday 23 December 22:58


Edited by Deep Thought on Monday 23 December 23:07


Edited by Deep Thought on Tuesday 24th December 06:43

Deep Thought

35,724 posts

196 months

Monday 23rd December 2019
quotequote all
Eric Mc said:
essayer said:
It’s decent but £7k? Unlikely

Also in year two remember HMRC will want next year’s tax bill in paid advance..

Tread carefully!
You might need to explain what you mean by that.
Yes, i'm curious about that too....

Edited by Deep Thought on Monday 23 December 23:08

Eric Mc

121,782 posts

264 months

Tuesday 24th December 2019
quotequote all
I assumed that essayer is talking about the Self Assessment Payment on Account system. These are normally payable by individuals who have a Self Assessment tax liability for a given year because they have income that is taxed under the Self Assessment income, such as profits from a sole tradership, profits from a partnership, dividend income, rental income etc

There are exceptions though.

Self Assessment bills of under £1,000 do not give rise to a Payment on Account.

Another example as to where Payments on Account are not required is where 80% or over of an individual's overall tax liability for the year is taken care of through PAYE.

For example, say an individual had an overall tax liability for a year of £40,000 but £35,000 of that had already been collected through PAYE, then the balance of £5,000 would be paid through Self Assessment.
But, even though £5,000 exceeds the £1,000 threshold for Payments on Account, over 80% of the overall tax liability has already been collected under PAYE which means that no Payments on Account will be needed.

essayer

9,011 posts

193 months

Tuesday 24th December 2019
quotequote all
Eric Mc said:
You might need to explain what you mean by that.
I think a lot of contractors get caught out by it, but for anyone who’s new to it - the first time you put in a Self Assessment that shows most of your income coming from outside PAYE, they’ll then expect the following year’s tax paid in advance

So a £12500 tax bill becomes £12500 tax to pay plus £6250 (January) and then a further £6250 in July. In following years it’s just the payment in advance and a balancing payment/repayment, but I know loads of contractors who got carried away in year 1 then had a big surprise on the next Jan 31st wink

And you can pay for various things via the company and increase the comparable salary - just do the numbers and don’t get carried away.

Eric Mc

121,782 posts

264 months

Tuesday 24th December 2019
quotequote all
I presume you are talking about contractors who take the bulk of their income from their own limited company in the form of a dividend or use some other "non-salary" tactic?

If that is the case, then you are correct.

If the contractor largely withdraws their income as salary, then the issue will probably not arise.

tighnamara

2,186 posts

152 months

Tuesday 24th December 2019
quotequote all
Eric Mc said:
Does the "employer" have an annual turnover exceeding £5 million?
Isn’t the annual turnover exceeding £10m and balance sheet total £5m with no more than 50 employees.

R.Sole

12,241 posts

205 months

Tuesday 31st December 2019
quotequote all
Eric Mc said:
I presume you are talking about contractors who take the bulk of their income from their own limited company in the form of a dividend or use some other "non-salary" tactic?

If that is the case, then you are correct.

If the contractor largely withdraws their income as salary, then the issue will probably not arise.
Isn’t the benefit of being ltd apart from the liability aspect to take the least amount as salary and the bulk as dividends to save NI?

Eric Mc

121,782 posts

264 months

Tuesday 31st December 2019
quotequote all
R.Sole said:
Eric Mc said:
I presume you are talking about contractors who take the bulk of their income from their own limited company in the form of a dividend or use some other "non-salary" tactic?

If that is the case, then you are correct.

If the contractor largely withdraws their income as salary, then the issue will probably not arise.
Isn’t the benefit of being ltd apart from the liability aspect to take the least amount as salary and the bulk as dividends to save NI?
Yes.

A limited company is still valid for genuine trading businesses. There used to be very good Income Tax savings too but these aren't so good anymore.

anonymous-user

53 months

Tuesday 31st December 2019
quotequote all
Deep Thought said:
You've missed any other deductables that can be made, including direct and indirect expenses and the basic tax band allowance of £12,500 before paying tax. Factor that in and any other deductables and you're back to around £6,200 again, which brings you back to a PAYE salary of £112,000 or so.

And yes, absolutely, i dont do it solely for the money - i do it not to have to have maybe 100+ people reporting to me, a multi £million budget to negotiate and balance, senior management breathing down my neck, strategic objectives to meet for the business, office politics to negotiate, etc, etc, ad nauseam that people on £100K+ salaries seem to have to endure.
I too have joined the ranks of people working as a contractor on a day rate, via my own ltd company.

I would echo the sentiments above that I now don't have to get involved in 90% of the stuff that goes on in a 'normal job'. I can just get on with whatever work they need me to do.

Plus, moving on to a different workplace or project every few months keeps it interesting. A change is as good as a rest and all that.

Money aside, those advantages alone are worth it.

Deep Thought

35,724 posts

196 months

Tuesday 31st December 2019
quotequote all
Lord Marylebone said:
I too have joined the ranks of people working as a contractor on a day rate, via my own ltd company.

I would echo the sentiments above that I now don't have to get involved in 90% of the stuff that goes on in a 'normal job'. I can just get on with whatever work they need me to do.

Plus, moving on to a different workplace or project every few months keeps it interesting. A change is as good as a rest and all that.

Money aside, those advantages alone are worth it.
yes

The work i do is project based so i go in usually at project initiation and stay until handover to the BAU team. Sometimes theres a second or third phase but its usually something new building on the original system we put in.

Nice to see something through to completion but then not having to be in the often boring role of then babysitting the system as part of BAU.


essayer

9,011 posts

193 months

Tuesday 31st December 2019
quotequote all
Deep Thought said:
You've missed any other deductables that can be made, including direct and indirect expenses and the basic tax band allowance of £12,500 before paying tax. Factor that in and any other deductables and you're back to around £6,200 again, which brings you back to a PAYE salary of £112,000 or so.
I guess if you rustled up an additional £600pm of allowable expenses you could be around £6200 but seems a stretch - based on £80k gross profit and no employer NICs your personal tax would be around £12500pa



YMMV - dependent on tax codes, other income etc

anonymous-user

53 months

Tuesday 31st December 2019
quotequote all
Deep Thought said:
Lord Marylebone said:
I too have joined the ranks of people working as a contractor on a day rate, via my own ltd company.

I would echo the sentiments above that I now don't have to get involved in 90% of the stuff that goes on in a 'normal job'. I can just get on with whatever work they need me to do.

Plus, moving on to a different workplace or project every few months keeps it interesting. A change is as good as a rest and all that.

Money aside, those advantages alone are worth it.
yes

The work i do is project based so i go in usually at project initiation and stay until handover to the BAU team. Sometimes theres a second or third phase but its usually something new building on the original system we put in.

Nice to see something through to completion but then not having to be in the often boring role of then babysitting the system as part of BAU.
I work in Housing so get brought into places when they are generally struggling with something.

Spent the last few months getting 4 new social housing estates from being stalled ideas to actually starting on site in about 4 months time, which is great.
I'm also helping another housing association with a load of 'no win no fee' claims that they have had come in.

I like it.