smallbusiness.co.uk: Helping your business think big

Small businesses often have trouble understanding the best way to pay themselves. For example, if you started your own limited company and work through another agency, you may fall under HM Revenue & Customs' IR35 laws.

Basically, IR35 was introduced by the government to prevent individuals from forming a company as a vehicle to receive income as a means of avoiding Income Tax or National Insurance Contributions. It applies where a single worker’s (‘the contractor’) services are provided to a client through a limited company (in which the worker has more than a five per cent share) where in other circumstances the worker would be an employee of the client. The Inland Revenue expects the income of the company (called ‘Service Companies’) to be treated as income of an individual. However certain reliefs are available including:
• Services companies are allowed to deduct five per cent of their gross fees receivable as expenses
• Travel expenses might be claimable if the contractor has a series of contracts with different clients around the country and they regularly travel from home to work at the clients
• Capital allowances might be available on equipment or cars

Basically once all the allowable expenses have been calculated the balance of the company’s income is treated as ‘deemed salary’ by the Inland Revenue on which PAYE and NIC will be payable. Failure to take the deemed salary as a salary (and pay over the appropriate PAYE and NIC) will incur further PAYE deductions in a ‘double tax penalty’ when it is eventually drawn.

There are a number of relevant Tax Bulletins and Booklets available from HM Revenue and Customs at www.hmrc.gov.uk/ir35/faq.htm

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