We’ve had a number of highly paid contractors come to us who are still outside IR35 and from a tax point of view are suffering in a way from an embarrassment of riches. They operate their own personal service limited companies.
They are highly skilled individuals who are paid well for their services. They have high income but because they are essentially selling their own labour have very few costs to offset against this income; the result is potentially high taxable profit.
We always have a pre year end meeting with these individuals to discuss potential mitigation of taxes payable. There is not normally one solution to this as we try and understand their individual needs and circumstances.
The client would normally be set up on a minimum salary (the secondary NI threshold for a sole director of £9,100) with remaining drawings taken as dividends.
If the client is happy to share ownership of the business we would also take care to set up additional shareholders. There are two significant advantages of this. Firstly, the other shareholder(s) can take advantage of the tax free dividend amount (£1,000 from April 2023). Secondly, but more importantly, dividends can be split between shareholders so all parties pay tax at the lower dividend tax rate of 8.75% compared with the higher rate of 33.75% or indeed the additional rate of 39.35%. Be aware that the basic rate band at which a tax payer pays the higher rate of tax on his salary, dividends and other income is £50,270.
Sometimes, our clients are in a position where they are planning to change their car. It may then be an attractive proposition to purchase through the business a zero emission electric car to take advantage of the 100% first year capital allowance with a very low benefit in kind (currently 2% of the list price of the vehicle).
An excellent and highly efficient tax saving option is to make a company pension contribution to the director(s) of the business. The amount is limited by the annual pension allowance of £40K (plus previous 3 years unused allowance) and is not restricted to the individual’s salary (unlike a personal pension contribution). The value of the contribution is fully deductible against corporation tax, growth in the fund itself is not taxable and 25% of the fund can be drawn down tax free post age 55. This decision on the level of contribution made will depend on the client’s need to have accessible funds. They may therefore trade off paying higher corporation tax in order to drawn down additional dividends in the short term.