tartantommy started this topic @ 12:03 on 08/12/2005
Hi
I currently work accountancy contracts for 6 months per year earning c£20-£25k in that time on a PAYE basis. A friend and I (he also works PAYE contracts) have just set up a property marketing website which we will both monitor from home with little input and expect will generate around £25k (after c£4k costs). Can anyone advise as to the most tax efficient way to set up? Our options as I see them:
1) Continue PAYE for our individual contracts but register as self employed, pay class 2 NI and declare a share of the website income each. Not sure how class 4 NI works if we're already paying class 1 as employees for our contract work?
2) Set up a limited company (either individually or together) and invoice for both the website income and contract income, take a small salary and pay the rest in dividends.
3) Partnerships options and using companies who offer composite company services for contractors have also been suggested but I'm not sure either will especially help.
Any guidance gratefully received.
Tommy
RE: Tax/NI advice please for self employed/PAYE status
James Smith | 08/12/2005 02:42 PM
I would start with a partnership and incorporate if things work out for you. With websites you tend to either earn nothing or loads, there is often not much middle ground. I.e. do (1), you are already in this category whether you like it or not if you have already commenced trading. Class 4 is based on your income from the partnership, it depends on whether you are HR or BR tax payer how much you end up paying. If you are HR, then 1%.
In terms of putting your current PAYE through a company, this hits all the IR35 legislation. Its really a case of looking at the nature of your current contracts if they are genuinely employment or self employment. The fact you are currently an employee will of course make this harder to prove that you are really just a contractor. To my mind the specialist contracting companies just make you an easy target for HMCE by putting lots of people together on the same contract. They only need to go to court the once to take the lot of you on, although you do of course get better backing than you would on your own.
Regards,
------------------------
James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773
---------------------------
Your indispensable guide to Small Business Bookkeeping, Self-Assessment & VAT
RE: Tax/NI advice please for self employed/PAYE status
tartantommy | 08/12/2005 03:43 PM
Thanks James, that's very helpful. Just to elaborate on the website, we have a definite income stream on its way (albeit with a 3 month time lag, being property sales related), so I am confident that my estimate of £25k p.a.(between the 2 of us) will prove reasonable.
Re the class 4 NI, is this calculated on solely the website income. i.e. competely separate to and in addition to any class 1 NI that I currently pay through PAYE?
Lastly re my contract work (and my colleague), I should have said that I am employed through an agency and not directly by a company and therefore work for different end companies from year to year. I have only heard through a colleague about using comapnies who offer composite set-up which has saved him money and I take your points re HMCE.
Given the above extra info, the income estimates and your own reply do you therefore think that incorporation is the way to go and if so, would my colleague and I be better using separate companies or would one company covering both our contract work and website income be a better option?
Thanks again for your help.
RE: Tax/NI advice please for self employed/PAYE status
James Smith | 08/12/2005 05:43 PM
Class 4 is based on the income from the website via your self assessment return, and then if you have paid too much overall you will get a rebate. It’s a fairly shoddy system.
The main problem with having a global company for both you and your partner is that if you both use the same company, then how are you going to achieve equity between you? If you earn £20k and they earn £30k, if you both own 50% of the shares you have just earned £25k each......which is going to cause some problems when you take the money out as a dividend and you really really don’t want to get into different classes of shares and dividend waivers.
Therefore I certainly wouldn’t have a global co. unless you are sharing all the money down the middle (ie you are partners in the non business sense too) I think it comes down to either having a company each and a JV for the property company, or a company for the property website only.
I would approach it by looking at IR35 no.1 and then working through implications. There is no point putting a contract into a limited company if you get hit by IR35.
Moreover if you are in employment the benefits of a limited company may or may not be very high depending on what you earn contracting, and how much money you plan to take out, and how much is re-invested. E.g. if you are both HR tax payers and plan to take all the profits it wont have saved you much tax at all. Its calculator time I am afraid.
Regards,
------------------------
James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773
---------------------------
Your indispensable guide to Small Business Bookkeeping, Self-Assessment & VAT
RE: Tax/NI advice please for self employed/PAYE status
tartantommy | 09/12/2005 11:56 AM
Cheers James. One last question if I can and if we can assume for the moment that my contract work will escape IR35 and I put this through my own limited company . You mentioned a JV for the property website income. Is this a separate vehicle with separate status or essentially just a name and therefore a simple case of my business partner and I each invoicing equal amounts through our respective companies. I think possibly that being able to invoice both my kinds of income through the one company would be required to bring it to the level of income where it would be worthwhile incorporating.
