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Limited company contractor
Limited company contractor
By Marie walshe In IT, Property Posted August 31, 2017 0 Comments
If you are a limited company contractor, you will have a lot more flexibility over how and when you pay yourself.

Assuming your contract work is not caught by IR35 most limited company contractors extract income in the form of dividends, and a small salary. The main tax benefit of incorporating is that dividends are not subject to National Insurance Contributions (NICs), whereas salaried income is. As a result, an average limited company contractor on around £300 per day, taking six weeks off per year, might save around £8,000 compared to an umbrella employee.

 What salary should I pay myself in 2017/18?

It is worthwhile drawing a salary from your company, as this cost is deductible against the company’s Corporation Tax bill.

 However, the tax benefits of drawing a salary diminish as you pass through the prevailing income tax and NIC Tresholds

 a)    £8,164 salary

 Here are some of general factors to consider when working out your optimum salary level (and that of your spouse, if applicable):

·          If you are entitled to the full personal allowance, you will not pay any income tax at all if your salary level doesn’t cross this threshold. For 2017/18, the personal allowance is £11,500 (in 2016/17 it was £11,000).

·          For the 2017/18 tax year, you only start paying Employees’ and Employers’ National Insurance Contributions when your annual salary reaches £8,164 (they have finally been aligned).

·          As a result, if your company is not claiming the Employment Allowance (see below), £8,164 remains a tax efficient salary to draw this year.

·          Make sure you take into account any other income you have already received in the current tax year (for example, if you received a salary from a previous job or have rental income).

·          There is no legal requirement to pay yourself the National Minimum Wage, unless you have a contract of employment with your own company which states otherwise (this is very unusual).

 How do dividends work?

·          Your company is entitled to distribute dividends from its retained profits, i.e. the profits in the company after all expenses and tax obligations have been met.

·          There are no rules which dictate how often you declare dividends; the key thing is that the company must have sufficient profits to do so at any given time.

  • Dividends must be paid to shareholders in amounts matching the percentage shareholdings
  • To make a legitimate dividend declaration, the company must record the decision via board meeting minutes, and must provide each shareholder with a dividend voucher (paper, or electronic).
  • You should keep your dividend vouchers safe, as you will need to use the information when filling in your annual self assessment
  • You may decide to split ownership of your company with your spouse (if applicable). This will enable you, as a couple, to benefit from your joint tax-free allowances, especially if the spouse has no other forms of
  • As a company director, you have the power to decide when to declare dividends. You may decide to postpone making a declaration until the following tax year, to minimise your higher rate tax liability, for
  • As a company director, you settle your outstanding tax liabilities via the annual self assessment

 How are dividends taxed?

On 6th April 2016, the way dividends are taxed changed significantly. Instead of a system of tax credits, there are now just fixed dividend tax rates, as follows:

  • 5% (basic rate)
  • 5% (higher rate)
  • 1% (additional rate)

Dividends are taxed as the ‘top slice’ of income, so after you have taken into account your salary, and any other earnings and investment income.

There is also a £5,000 ‘dividend allowance’, however this sits within your existing tax bands. This will be reduced to £2,000 from April 2018.

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