IT Contracting Question

[PlazaCommerce]

So my career as an IT contractor is about to begin. I've got a limited company and an account with HSBC. I've worked out the following scenario and would be vary grateful if people in the know could confirm or deny that this is accurate.

Firstly, my contract is worth approx £4,300 per month (5 month contract). I will need a rail card at a cost of £200 to get there.

My scenario is:

Company revenue - £4,300 per month
Gross profit - £4,100 per month
My wage - £476 per month
Net profit - £3,624
Profit after corporation tax - £2,863
Dividend payment to director (me) each month - £1,324

This would leave a total of £1,539 after tax, and after dividend payments.

The reason for £476 in wage is to avoid paying tax and NI on my salary. I would pay 21% corporation tax and then take out the dividend payment.

So, one payment marked as wage for £476 and then a payment of £1,324 marked as a dividend payment each month.

Am I way off the mark here?

 

[elaine@cheapaccounting]

What is the £1539 for?

 

[elaine@cheapaccounting]

Don't forget things like use of home as office, accountants fees.

Are you vat flat rate registered?

 

[PlazaCommerce]

What is the £1539 for?

The £1,539 is the amount left over in my company each month after taking into account corporation tax, salary, expenses for travel and dividend payments.

 

[elaine@cheapaccounting]

The £1,539 is the amount left over in my company each month after taking into account corporation tax, salary, expenses for travel and dividend payments.

Yes I know how is it worked out but what is it for? Why are you leaving it in the company?

 

[PlazaCommerce]

Yes I know how is it worked out but what is it for? Why are you leaving it in the company?

I'm hoping to do some travelling next year, and I'll use the money left over to continue paying myself a salary whilst I'm travelling. I don't see much point in withdrawing it all in one go, as surely I'll end up paying more tax?

I'm hoping to get 12 months contracting in, leaving around £13,000 in the company. Whilst abroad, my company will still pay me a salary and divi payments.

 

[elaine@cheapaccounting]

ah right - I see now. Of course do make arrangements, employer end of year return, co accounts, annual return, annual accounts etc to be done whilst you are overseas.

 

[PlazaCommerce]

ah right - I see now. Of course do make arrangements, employer end of year return, co accounts, annual return, annual accounts etc to be done whilst you are overseas.

I'm assuming most of that can be done online? If so, shouldn't be an issue.

Is the above accurate in that the only tax to be paid would be the 21% corporation tax?

 

[elaine@cheapaccounting]

yes - CT at 21% is correct

As regards doing it all on line - good luck with that

Have you done these things before?

 

[Tax Specialist]

Hi,

Yes, you have the scenario about right, but make sure you pay yourself
a salary sufficient to qualify for a year's contribution to your State Pension entitlement, or you might lose out when the time comes.

You need to document the dividends properly or HMRC may reclassify
them as salary. Your accountant should be able to advise you on this
and also the possible application of IR35.

Bear in mind too that, as from April 2011, all limited company accounts and tax returns need to be submitted using iXBRL-compliant software.

Best wishes,


Tax Specialist

 

[PlazaCommerce]

yes - CT at 21% is correct

As regards doing it all on line - good luck with that

Have you done these things before?

Kind of, but I'm steadily working my way through Accounting for Dummies and another book about limited companies.

If I wasn't intending to travel, would it be better to not keep profits in the company account? It was my assumption that if the value of dividend payments exceed £37,400 in a single year you start to pay a large amount of tax on it.

Also, assuming in year 1 the company made £20,000 profit (after tax) and year 2 it made the same amount, but the company had £20,000 in its account at the beginning of year 2 (so at the end of year 2, the company has £40,000 in the account) I assume you are only taxed at the end of year 2 on £20,000 as that was the profit made in that year?

 

[robindunne]

So, one payment marked as wage for £476 and then a payment of £1,324 marked as a dividend payment each month.

Am I way off the mark here?

That means you would have to register for PAYE. If you knock your salary down to £450 a month there will be no need.

However, paying between £105 and £110 a week will maintain your NI stamp, without paying NI. So I guess it's up to you, is registering for PAYE and the added admin worth the years NI stamp?

 

[elaine@cheapaccounting]

Assuming no other income then keep with salary £476 x 12 = £5712 plus divs of approx £34.3k per year - no additional income tax.

This is why you need an accountant!

 

[elaine@cheapaccounting]

That means you would have to register for PAYE. If you knock your salary down to £450 a month there will be no need.

However, paying between £105 and £110 a week will maintain your NI stamp, without paying NI. So I guess it's up to you, is registering for PAYE and the added admin worth the years NI stamp?

IMO this needs careful consideration - not registering and doing a wee bit of paper work means missing out on NI credits towards pensions and other benefits.

I have seen cases in the past where an accountant has been too lazy to do the paper work but IMO on does what is best for the client and not the accountant.

 

[PlazaCommerce]

Assuming no other income then keep with salary £476 x 12 = £5712 plus divs of approx £34.3k per year - no additional income tax.

This is why you need an accountant!

I think if I paid that amount per month into my current account I'd just spend all the money on crap! I'd rather keep it locked away in the company and just take out a sensible amount each month.

 

[Tax Specialist]

Hi,

Actually, the small profits rate of Corporation Tax goes down to 20% as from 01
April 2011, but the Accounts will then need to be submitted on iXBRL-compliant
software, which you will need access to.

 

[elaine@cheapaccounting]

OK but then make sure you plan things so that in one year you don't need to take out a huge amount e.g. looking into future if you continue to do this & you need a deposit on house. A little bit of tax planning goes a long way!

 

[PlazaCommerce]

OK but then make sure you plan things so that in one year you don't need to take out a huge amount e.g. looking into future if you continue to do this & you need a deposit on house. A little bit of tax planning goes a long way!

That's a good point. Maybe put the surplus into a high interest personal account? Hmm...

 

[elaine@cheapaccounting]

That's a good point. Maybe put the surplus into a high interest personal account? Hmm...

you see - that is why you need a good accountant

 

[Maslins]

Plaza, what you're doing sounds perfectly sensible.

May be worth declaring an additional big dividend just before the end of the tax year. You can leave this cash in the company bank account, with it showing in the accounts as a director loan to you.

Like Elaine says, what you don't want to do is just take a small income one year, then a massive one the next. If the profit is there, you may as well declare dividends up to the higher rate threshold. Whether you draw the cash out or not is up to you.