I am currently sole director of a small limited company that is turning over about £40K a year. My wife is employed on a basic wage by the company to use up her tax allowance as she has no other income. I am currently sub contracting myself to another company to do effectively a full time job (40hrs a week) and get paid by invoice (this is the bulk of the company turnover).
My wish is to move to a PAYE employee of the other company and possibly wind up my Ltd company.
My biggest worry is that I need to get approx £3000 per month after tax to live on and on the PAYE model that is a stupid salary... Is there a good way to get the physical cash I require while minimising my tax liability?
I have several options open and the 'new employer' is happy to consider any suggestion I have as to my package. Options could include loosing my car and getting a company one, or them paying for it... I really do not know...
The other thing I need to consider is that we currently get the full rate Tax credits etc... which I assume will stop when on PAYE at this level...
That sounds rather as if you fall under the IR35 rules.
Remember that at the moment neither you nor your "employer" is paying National Insurance Contributions. So if you want to earn the same net amount, your employer will have to find substantially more than
40k to pay for you.
If at the moment the 40k pays you and your wife a 5k tax free salary each, then your company pays 19% CT on the remaining 30k which you then take as tax free dividends. Hence your combined net income should be 34.3k pa ("approximately 3k pm").
To earn the same net amount under PAYE, I estimate you would have to earn nominally around 48.4k, which will actually cost your new employer about 53.9k.
I suppose that could be regarded as "stupid". Realistically, you would have to reach a compromise. Instead of costing them 14k more, suggest they may like to find 7k more, and this means your net income goes down by about 4.2k. Then send the wife, who would then no longer be "running your office" for 5k pa, out to earn 4.2k running someone else's office.
You are correct about the IR35, although, up to about 10 minutes ago I hadn't heard of it!
A salary of nearly 54K is possibly more than the senior staff currently get so my chances are not good ;) - The East Midlands and 'large' salaries don't go together...
I like the suggestion about my wife, however she has just finished her LPC and is off in to the working world as a solicitor... this has kind of forced my hand on this situatuation... I am wondering if I can reduce my tax liability this year by making her redundant rather than her just letting her go?
My other thought about this need to increase the salary to make up the shortfall, I currently use about £400 a month of my income to pay for, insure, tax etc my car. This is before fuel and servicing etc, could a company car help? I know it will adjust my tax code but I'm unsure if I should suggest this as a good thing in my favour?
The salary isn't 54k, it's 48k. At least, that's the amount you would need to use when comparing your putative salary with that of your senior colleagues. You see, 54k is merely what it would cost your employer to employ you at a nominal salary of 48k, and similarly it costs them more to employ the seniors than what their nominal salaries are. This is all due to the employer's National Insurance contributions at
12.8% of (salary-5k).
But I see the problem. Still, you will need to reach a compromise between them forking out more and you taking home less.
Ah well. See below.
I wouldn't recommend it.
What shortfall? Now that wife will be earning a decent salary instead of a mere 5k "working" for your company, your joint household income will go up, not down. So I don't see where this "need" to increase is coming from. It means, to put it bluntly, that you should be easily able to afford to take a cut in your take home pay, and even consider the possibility of taking a salary which will *cost* your employer no more than at present. It would cost them 40k to pay you a nominal salary of
36k of which you would get to keep 26k. That represents a cut of over
8k to you, but don't forget that (a) wife will be earning more than 8k, won't she?, and (b) because of IR35, you may need to repay loads of tax and NI from your "ill-gotten" 34k at the moment if HMRC finds out, and your de facto employer may also be collared for back-NICs.
That must be a very expensive very young car.
I doubt it. First, a company car will add to what it will cost your employer to employ you (unless they compensate by offering you a lower salary), and if it does that, they might as well just pay you more instead, unless it's all just a face-saving exercise. Does it look better to pay you a salary lower than that of your senior staff and then add a car on top? Do the seniors have company cars too?
Second, a company car if available for private use will be taxed as virtual income you don't even receive, as a Benefit in Kind. The formula is outrageously unfair to the extent that in most cases a company car is poor value for you (unless you make very much private use of it *and* reimburse your employer for the cost of private use).
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