I am about to go into software contracting

[Quantum44]

I am about to go into software contracting, what do you think of this approach which I have received independent advice on 1. Form a limited company 2. pay yourself a £500 month salary to avoid some NIC. 3. Pay the rest of the money to your self in the forms of dividends, which you only pay 20% tax on. yeah :)

[Williams lester]

Depends how you will be working, and whether there is a risk of being caught by IR35.

[Quantum44]

well I don't plan on doing anything illegal, is what I mentioned sound dodgy to you?

[elainec100@cheapaccounting]

3. Pay the rest of the money to your self in the forms of dividends, which you only pay 20% tax on. yeah :)

??? don't get this bit

Dividends are paid out of post tax retained profits. CT rate is 21%. There is no additional income tax to pay if below the higher rate tax threshold.

My advice - get your contract vetted by the PCG and get an accountant to sort out your accounts.

[Tom McClelland]

??? don't get this bit

Dividends are paid out of post tax retained profits. CT rate is 21%. There is no additional income tax to pay if below the higher rate tax threshold.

My advice - get your contract vetted by the PCG and get an accountant to sort out your accounts.
Elaine is quite right. Budget the cost of having a professional prepare accounts and CT returns into your plan. The cost of doing that is lower than the tax saving.

And remember that it is not just the contract that counts; it is the reality of the engagement that determines whether you are an employee or not. A key test is the "right of substitution". ie could you send someone else along to do the work instead of you, and would the client allow this? Even if the contract says you can do that it doesn't matter if in reality the client wouldn't permit it.

Also remember that contractors aren't entitled to sick pay or holiday pay or any other employee benefits such as staff canteen, staff car park, etc, so for a level playing field your net needs to be c. 15% higher as a contractor than it would be as an employee.