Contract subject to IR35 (inside)
Once you have decided how you choose to operate in relation to IR35; if you decide to operate inside of IR35 legislation then the only method of paying yourself is by a salary. This means that all income (net of applicable expenses) must be taken from the company as salary and therefore you will pay income tax and National Insurance contributions through the PAYE system.
Contract not subject to IR35 (outside)
If you decide to operate outside of IR35 then you can pay yourself in a number of ways which gives you flexibility and helps to minimise your tax bill. Typically you might pay yourself via salary and dividends alongside reimbursing any expenses you have paid for out of your own pocket.
Salary (outside IR35)
Generally speaking, we will look to get a salary set up to optimise your tax efficiencies. This often is a low level salary that’s high enough to maintain your National Insurance record but low enough to minimise any tax that comes with this. As you may have been used too previously, all the taxes on salary are deducted at source and this will be shown on your payslip.
Dividends (outside IR35)
As the shareholder of your own limited company, you can withdraw the profits your company makes as dividends. These dividends are often more tax efficient than taking further salary and our portal will be the key tool in showing you the profit available for distribution as dividends and also advise of any tax provisions that need to be set aside outside of your limited company. You will also need to complete the dividend paperwork that your accountant can provide a template for where needed.
To give you an idea of the taxes applied to dividends, the first £2,000 of declared dividends will be considered tax free for each shareholder each tax year. If you do opt for a salary lower than your personal allowance (£12,500 for 2019/20 tax year) you will also receive further tax free dividends equal to the difference. The remaining dividends will be taxed at 7.5% if your personal total taxable income is less than £50,000 and 32.5% if greater. The tax rises further if an additional rate tax payer(38.1%) but your total personal taxable income would need to exceed £150,000.
Please do not hesitate to get in touch with your accountant if you would like to discuss this further.