Introduction
Contractors working via their own limited companies need to pay themselves a
salary. This article discusses the level of salary to pay depending on IR35
status.
Tax and IR35 issues
An optimum salary minimises the tax burden and maintains a working year credit
towards the State Pension Scheme.
The optimum salary level depends largely on the IR35 status of your contract –
inside or outside IR35.
The optimum salary level depends largely on the IR35 status of your
contract
David Colom
Outside IR35
Before IR35, most contractors paid themselves a salary around £5,000 per annum,
with the balance being paid out as dividends.
Contractors outside of IR35 should still continue with a salary of around
£5,000.
One advantage is that £5,000 is just above the threshold for National Insurance
Contributions. Paying a very small amount of N.I. Contributions means you will
receive a “working year” credit towards the State Pension Scheme.
There is also an income tax advantage by claiming your personal allowances
against a salary.
Inside IR35
Contractors inside IR35 cannot use the option of low salary with
dividends
David Colom
Contractors inside IR35 cannot use the option of low salary with dividends.
The IR35 legislation effectively forces all income, after certain allowable
expenses, to be paid in the form of a salary only.
The exact amount of the salary needs to be calculated in accordance with the
HMRC criteria, which can be found on the
HMRC website. You can also use the IR35 calculators on
www.ir35calc.co.uk .
During the year, a salary is drawn “on account” of the amount deemed by IR35.
Each month a best estimate of the IR35 deemed salary can be paid - approx 75%
of the IR35 contractual income. For example, if monthly contractual income is
£5,000, then you a suitable gross salary “on account” would be £3,750.
The figures would be slightly different if you were making use of a contractor pension to reduce the amount of IR35 taxes you pay.
David Colom
Principal
D J Colom & Co Chartered Accountants
David Colom qualified as a Chartered Accountant in the City of London in 1981 and is the founder and principal of D J Colom & Co Chartered Accountants established in 1989.
Started specialising in serving IT contractors in 1993 and is now one of the longest standing suoppliers of accountancy services to computer contractors.
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The exact calculation of the IR35 “deemed payment” can be done in late March,
and the balancing “IR35 bonus” can be made prior to the end of the tax year on
5 April.
National Minimum Wage Issues
The National Minimum Wage legislation does not apply to directors of their own
limited companies, unless there is a contract of employment with the company.
This is very unlikely in the context of a one person company.
Published: Tuesday, September 23, 2008
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