Going self employed.

Your employer will deduct NI from your salary using the standard PAYE system.

You need to contact the Inland Revenue, check

and look for self-employed to get them to start charging you NI for your self employment. This is the basic level of around 10-12 a month. When you send in your tax return they will calculate the extra based on you profit for the year.

"I am starting my own business in MAY" might mean a Ltd. company or other entity that will employ the OP in which case he will not be self-employed, he will simply have a new employer who will do PAYE as well.

Indeed, and that is what I will be doing myself. I probably won't be paying myself any salary for a few months, so does that mean I won't have to pay an NI?

Thanks

If you earn nothing you certainly don't have to pay any NIC, it might be a good idea to keep them up but there's certainly no requirement to do so.

Or pay a small salary and loan it back to the company.

How can he work for the Ltd company without hte Ltd company breaking the minimum wage laws?

Jim.

"Jim Ley" wrote

Minimum wage doesn't apply to Ltd Co *officers* (eg directors).

Does the Revenue not have any defences against this? Could one indefinitely loan money to one's ltd, and keep repaying it as salary under between the Earnings Theshold and the LEL, thus effectively obtaining BSP (and presumably Second Pension) rights at no personal cost? Would the Revenue not have the power (as seems reasonable) to match the 'repayments' with the loan account before accepting any excess as a salary payment?

No, The risk with the employee is that they may not get the loan repayed.

It is quite common for directors of start-ups to nominate themselves a salary of the top of the basis tax rate and not actually pay it. Several years down the line the company could owe them 60K which they draw when they can afford to do so.

This is not quite the same thing, but I still think that you can do it. Not many people are in the position of having the funds to survive several years of zero income.

No, the company directors are entitled to fund the company in whatevere way they see fit.

tim

Not only no power but also, they probably don't even know who is actually funding the company. The company accounts that need to be forwarded to them, and even the more adridged accounts to be sent to Companies House, need to show a figure for creditors but do not need to break that down showing who the company actually owes the money to.

"tim" wrote

Why the *top* of the basic rate band?

Surely it would be more tax effective at the top of the *nil* rate band (ie at the personal allowance) :-

Every extra 100 revenue in the company paid out as salary (in basic rate band) would give a salary of 88.65 after employer NI, which gives just

59.40 net pay after 22% income tax and 11% employees NI.

If that 100 revenue had instead fallen to profits, and the maximum paid as dividends - then an extra 81 dividend could be paid (after 19% corporation tax). For as long as the director is not a high-rate taxpayer, there is no further personal taxation of that net dividend.

Isn't over 80 net money to spend, better than less than 60 net money to spend??

because they expect to save higher rate tax in years 3, 4,and 5....

Note that when they are actually making enough money to pay themselves a 'salary' in the higher band they will actually pay themselves an equivilent dividend thus saving the NI. But you can't pay an advanced dividend to yourself in years when you don't have the cash available.

You've made the false assumption that there is a profit to distribute. New starts often make a loss year 1 and 2 even before the director's salary is paid. The unpaid salary just makes the loss bigger, a dividend cannot be paid in this circumstance.

tim

"tim" wrote

But they could *also* save basic rate tax (& e-ee, e-er NI) in years 1, 2, ... !

"tim" wrote

I'm not suggesting an "advanced" dividend - I'm suggesting a dividend in those later years.

I thought you were suggesting that the "early" salary actually *not* be paid, but owed from the company - and then paid "late" from revenue generated in the later years? So a later dividend paid in year 4 (say), is equivalent (in cashflow terms to the recipient) to a delayed salary from year 1, paid in year 4 (only with less tax involved for the dividend).

"tim" wrote

No, I've not. The revenue which I am talking about, is that revenue which comes in years 4, 5 etc - which you are intending to use to pay the years 1,

2 salaries from!

"tim" wrote

Agreed - but the dividend can be paid in years 3, 4, 5 out of the revenue which, in your case, would instead have gone to pay for years 1 & 2 salaries.....

Even if some/all of those dividends fall into the higher-rate tax band (and therefore create a further personal tax liability of 25% of the net dividend --- 32.5% less 10% credit of gross dividend), then the recipient still sees 81 x 75% = 60.75 of each 100 revenue used to make payments to the director/shareholder.

If it had instead been paid as delayed salary in the early years, the director/shareholder would only see 59.40 of each 100 (see above), so is still a little better off.

The company would have to make profits well in excess of 300,000 each year, from as soon as it does start making profits, for it to be better to set the salary at the top of the basic rate band - as you suggest.

If they don't use the basic rate band in years 1 and 2 they will lose it forever.

Dividend are taxed in the year that they are declared.

using some rounding in the figures here:

In year 3 you have 90K to pay as salary for years 1,2 and 3. So if you declare a 90K dividend in year 3 you will pay 0/10/20% tax on 30K and 40% tax on 60K.

If you have previously allocated 30K salaries in years 1 and 2 which are still owing, you will pay 0/10/20% tax on the whole of the 90K.

Yes this has a negative effect on cash flow and more NI is payable, but overall you are up on the deal (I think).

All I was doing was reporting what I knew others had done. I wasn't recomending it as a strategy (and I suspect that the maths may have changed for the worse since the recent changes in NI)

tim

"tim" wrote

Well it would be good riddance, because it is worse than the alternative!

"tim" wrote

You forgot the 12.8% employer NI and the 11% employee NI - that's an extra

23.8% ! In other words, those three 30K salaries would cost the company 99,640 but only net the recipients 65,898 (using 2005-06 thresholds).

Instead, using the 99,640 to pay dividends would net the recipient

68,923 - around 3,025 more than paying salaries!!

"tim" wrote

I *don't* think so (see above).

"tim" wrote

Indeed, (I believe) it has.

Before the NI rates were increased by 1%, I believe it would indeed have been a shade better to use the basic-rate salary band instead of paying dividends.

"Tim" wrote

Whooops - I forgot to allow for paying salaries at the personal threshold (4895 for 2005-06) before dividends - which means around 15K of the payout would be tax-free :- That means the recipient would instead net 73,585 in year 3 --- ** 7,687

** more than paying "top of basic rate" salaries ... !!