UKC

I work for myself via a limited company.  It turns out that entirely legitimately I can not pay any income, NI, corporation tax, or VAT, probably indefinitely, while having reasonable income. I'm not really comfortable with this but equally  "voluntarily" paying tax seems weird.  What would you do?  Options seem to be

a) pay tax by making less than optimal financial choices for the company (not sure if this is even legal given the company is it's own entity),

b) pay something to charity personally to replace tax

c) pay something to charity via the company to replace tax

d) just take the money.

Would not paying NI impact your state pension entitlement in the future?

The (odd) thing is you get NI years without actually paying NI with a salary below a certain level.

Are you sure about that? It's been a decade since I was self-employed but my accountants made it clear the most efficient strategy was to pay X amount of salary to meet NI contributions.

Generally, it's best not to take the **** with the taxman. You probably haven't found the loophole you think you have, or everyone would be doing it.

I assume you've checked your NI record online? I've had a few gaps where I was either abroad or went from self employed to working for an employer. In reality for myself it's an irrelevance as far as my state pension goes as I have more than enough complete years anyway.

Yes - that's the situation

Everyone (well many!) are doing it - it's not a loophole it's just the way things are arranged by the government. E.g.

https://www.rdgaccounting.com/what-is-the-ideal-directors-salary-for-2023-2....

The company pays tax though, at least if you make a profit. If you're not making a profit, you'll find it hard to pay yourself. So you are paying tax.

I don't want to go in to every detail, not because of anything untoward, but because I'm not really looking for financial advice so much as how people feel about being in a position where they are untaxed.  Suffice to say what I outlined above is the legitimate situation without any shenanigans around loopholes.

I'm intrigued.

How can it become impossible to pay any tax ifyou have a reasonable income?

Well OK roughly

-Salary below tax threshold

-Dividend below tax threshold

-Company pension payments untaxed (certainly for now, may be taxed in future when taken, I guess)

-Wife with income to live on in the near term

I pay quite a lot of tax, but in my view not enough, hence use (b) to a significant extent to address that……noting this isn’t great as ultimately its my personal view of what is important/worth funding rather than a collective societal view achieved via elections etc. Hence my actual preference for higher taxation rates to properly fund services society needs but my single vote in the area I live in fails to have much impact/chance of change. 

Yes, I am inclining towards that.  I don't have a big problem with the choice thing.  Hypothetically if everyone supported society this way it would be like voting, although I suppose richer people would have more influence than poorer people.

Most of those probably defer tax rather than avoiding it.

Don't forget that it is exceedingly unlikely that you don't pay VAT on a wide range of goods and services that you purchase with either your salary or your wife's income.

This is the case with many company owners/directors - BUT if you were to pay yourself the figure that you would need to live on (lifestyle dependent) and weren't in the position that you are in with respect to partners income etc. then you would be paying tax. 

For me it works out a bit like this:

PAYE figure to keep NI stamp ticking over. There is a minimum for this I'm pretty sure, check again with the adviser. 

Dividends for the rest - this is tax beneficial for me - although I am still paying a chunk of tax on the dividends it isn't as much as it would be if I was 100% PAYE. The clincher here being that the company needs to make a profit in order to pay through dividends and the profit needs to be enough to pay the dividend. This dividend is then pre - corporation tax so the dividend is part of the taxable profit and contributes to corporation tax costs. As a result the company has a higher corp tax burden so there is still a tax contribution, it just means I personally keep a higher proportion of my income but the company pays a higher tax.

Pensions are a way to reduce this tax burden even further but I'm a good 15 years from pensionable age so working towards this later.

If you feel you are paying less tax than you are comfortable with then a company charitable contribution is a strange way to try and change this - it would be tax deductible for the company and so would reduce the amount of tax you are paying.

You can of course switch yourself over to a higher level of PAYE which will increase your tax and reduce your company profit.

It's a balancing act and you have to decide the best way to do what you want - the charity contributions can be a bit of a sticking plaster though as many charities are paying board members high figures - so you may just be paying another CEO a chunk of salary.

For me the question is, are you:

A. Really living on £12,570 plus your wife's income, with any profits genuinely invested back into the business.

B. Bemused how new cars, other assets etc. for you and your wife's personal use mysteriously appear out of the ether after being purchased by 'the business'?

If it's A then crack on. If it's B, have you considered joining the conservative and unionist party to really increase your wealth?

Indeed, which is why I am also against the new approach of billionaires who avoid tax then deciding which cause they feel is worthy of the profit they have obtained, often in large part due to avoiding tax.

Clearly it would be worse if they didn’t give away their money, but ultimately it is changing the dynamic of everyone regardless of wealth having an equal say where taxation income goes via elections to one were a few people decide which is not very democratic.

just recognise that salary sacrifice by paying into a pension is acceptable as you will pay tax whn you draw down on the pension.

Or stop putting money into pension and take as dividend and pay tax if you want.

Top tip, thanks

I can only assume it's because your company hardly makes any money, but apparently, you have a reasonable income? Are your living expenses just very low, or are you some tax loophole wizard, if so please enlighten us.

But if you're feeling guilty about being one of society's spongers I can only suggest you earn more money so you'll qualify for tax and contribute to the cost of running society if that's what getting to you.

You provide society with more of whatever goods or services you produce, they benefit, in exchange for money which you keep after the government has taken their cut. 

It's worth noting that you can make voluntary NI contributions even if you are below the threshold for statutory payments. Worth considering as this affects your pension entitlement and also right to access certain benefits should your financial situation suddenly change.

Personally I'm of the view that we should all be taxed more at the point of earning, to fund essential services. People don't miss the money they never have in their pocket and it levels up in a way that higher costs at the till don't.

That said, assuming this is a 100% legal tax reduction (rather than the murky area of tax avoidance) why would anyone voluntarily pay more tax than they need to?

Indeed, if MG is really earning that little, then I don't see any problems at all and would not be feeling guilty about paying no tax. The fact he suggests he has considered giving money to charity seems odd when his income is barely enough to survive on these days.

That is my option d).  I'm actually  surprised not to be labelled evil capitalist scum, given UKC's on tax and large companies (may be that's the dislikes).  Are small companies somehow different?

As above, that's not the case.  My income (in various guises) is comfortable.

Well because it's quite nice having a functioning society  - roads, schools, health etc. - all of which need paying for.  If I pay no tax and someone on comparable income pays 30% or whatever, that doesn't seem very fair.

It’s an interesting subject. You get people like Caudwell who lord it that they pay U.K. tax yet have charitable organisations so clearly off set it.  You get Coates who takes a salary and pays something like £30 -£40 million a year in personal tax. Jk Rowling is similar.

Everyone is entitled to the tax free personal allowance of £12,570.

That is below minimum wage for full time hours, but for someone part time earning that amount they would not be paying tax.

Any dividends you pay over £1,000 are also taxable albeit at a lower rate.

Could you live on £13,570?

People who don't earn very much don't pay much tax.

The worse thing is dealing with accountants who assume that you want to pay as little tax as possible. They are often surprised when you say the opposite. 
 

What disappoints me is that income from non-paye sources is taxed at lower rates, when it's all money gained personally. IMO dividends, interest, investment returns and maybe even inheritance (though that be more complex) should all be classed as income and should be taxed at the same progressive rate. Doing otherwise just enables those with money to pay proportionally less tax on their income than those without.

Right, so you are paying NI and tax, but because you're operating through a limited company, it's being paid by the 'employer'....still effectively you.

You're just avoiding the personal NI and income tax by deferring the bulk of your remuneration to your pension. We have pretty generous tax breaks for doing this whether self-employed or employed, I certainly make use of salary sacrifice!

Seriously?

Every time you put 100 quid in your fuel tank the government gets 53 quid.

Every time you buy a pint the government get another 60p.

People like Rees Mogg have their money in the Cayman islands and you're feeling guilty?

E

It would make life a lot simpler.  It gets more complex when the corporate tax system exists alongside individual taxes.  I don't think you could have common tax rates across everything.

No need to pay an adviser here, you can check your own account online and make any voluntary payments to keep up-to-date.

You can also choose to pay more tax than you are required to to HMRC

No  - there are various thresholds, personal and corporate but easy to stay below them.

To an extent but 25% is tax free and then the annual allowance still exists so it will likely be a low marginal rate.

But surely corporation tax applies to profits while the funds are still within the company. The moment any funds make it out into personal accounts, that would be classed as income. Shouldn't matter whether it's salary, dividends, share sales or whatever.

 Not really. Dividends go to a wide mix of shareholders ranging from individuals to investment funds to other companies to charities and so on. To think of dividends as just going to individuals is misleading. 
 

And often individuals who invest as shareholders  have already paid tax on that cash before they invest it. 
 

And do not forget that capital gains on investments are also taxed as well as the dividend. 

Hit the nail on the head. 
 

Dividends, for example, are currently taxed at corporation rates as profit and then at a lower rate for individuals as dividend income. The net effect is vaguely comparable to the income tax rate.  If individual dividend tax rates were raised to the income tax level, overall the rate would be higher.  Does this work?

None of which would makethe slightest difference to the idea of taxing all additional funds arriving in personal accounts at the same progressive rate. If you've already paid tax on investment money, that changes nothing because it's only the profit from the investments that you'd be taxed on. Why should investment profit be taxed at a lower rate than salaried income?

That's exactly how it should be, I'd say. It isn't about the amount of tax ultimately paid on company profits - if it was, then the idea of progressive personal income tax wouldn't make any sense. It's about people personally gaining from either their own endeavours or from their financial investments, and those gains being treated similarly.

In fact, were this to be the case, we might even be able to reduce the rate of corporation tax, seeing as when money is ultimately taken out it would be taxed at a higher rate, which itself could provide a huge boost for company profitability.

EDIT - i might be remembering things incorrectly so the below could be wrong. But this is/was my understanding from 3-4 years ago…. I forget how corporation tax plays into the dividend aspect though 

With a LTD company (numbers may be slightly out as it’s a while since it effected me) it generally is done by…

1: take minimum salary to still get NI months/years (approx £6400 per year i think). Due to the level you don't pay any tax/NI

2. given you are a director then You can take dividends out. These are taxable but as a lower rate tax payer (due to salary in #1) the tax is lower than taking a normal income, and there are no NI contributions. Dividend tax rate is 8.75% for lower rate tax payers.

So you could pay yourself £50k via salary and dividend, have £14k tax free allowance (£2k is dividend allowance) and pay 8.75% tax on the remaining £36k. Effective tax rate is then about 6% and you also don't pay any NI, but still get your pensionable year.

If you have more than £50k income into the limited company you can invest it into the business, buy things you need (laptop etc), pay it into a private pension (tax free), pay for travel/accommodation. Any profit left you pay corporation tax on.

If you’re a tradesperson or something then it probably ends up about normal due to all the expenses/materials. Where it’s different is, say, if you work in IT and you charge a day or project rate and don’t really have any overheads.

Then you either keep money in the company or try to take out as much as you can via (completely legitimate) lower tax methods.

Not anyone (in the IT sector anyway) can do the LTD company route though now. New rules (IR35) put the onus on the company you do the work for to decide if you are inside or outside of the rules. So if they say you can work via a LTD company then any future tax investigations into whether it was appropriate would fall on them, not the LTD company. Though there is a small business exclusion where, i think, the responsibility to determine falls on the directors of the company.

I’m a contractor and my current employer decided I fell inside the IR35 rules, so my day rate is essentially a normal salary with normal taxation. But if they said I fell outside of the rules then I could choose to go down the LTD company route and save a lot of tax.

I did a very short spell working via a LTD company which wasn’t beneficial to me tax wise for various reasons. But when i did this I charged 20 days per month and paid 1 day of this to a charity each month to offset a bit of the potential gain i could have had.

As I said your capital gain is taxed when you realise it.The income stream is taxed at dividend rates.

Overall when you factor in captial gains tax I would suggest its the same.

Rishi Sunak is paying an effective tax rate of 22% 

https://news.sky.com/story/rishi-sunak-releases-tax-return-details-showing-...

o you mean people on low income (eg, relatively poor)? Because if so then this is one of the biggest myths going.

NI, council tax, fuel tax and VAT on pretty much everything they buy means they're paying a much bigger proportion of their income towards tax. They're less likely to own their own home so are paying (already potentially taxed) income to a landlord (who will likely be taxed also but there's tricks and loopholes there too).

I listened to this News Agents podcast a couple of days ago that made the interesting point that taxing income is particularly hard hitting on the poor, whereas we (the UK) tend to see taxing 'wealth' (capital gains, property, dividends etc) as untouchable for some bizarre reason.

https://www.globalplayer.com/podcasts/episodes/7Drh336/

The argument was that increases in wealth are far outstripping increases in income. This simply widens inequality because individuals can't 'work harder' to catch up with appreciation of capital and property. 

But those are not untouchable.... far from it. Corporation tax rates have risen ( depsite protests form the corporate sector), the thresholds for dividend payments have been adjusted, capital gains taxed has adjusted and so on. Its a bit playing to the gallery to say nothing has changed and they are untouchable. Evidence suggests otherwise.

Hang on, how are you avoiding corporation tax?  

I was about to say that it's just swings and roundabouts - you could either pay yourself the salary, and pay the NI and income tax on that, or keep it in the business as profit (paying 19% corporation tax, or 25% if greater than £50k) and then take it as dividend (paying 8.75%).  And that's all going to work out roughly the same. 

Yes you can put it into a private pension, but apart from the 25% tax free sum that's going to be be taxed eventually anyway.

Give what you said in your intro, it sounds very like you are the only employee of the company and hold all the shares. If this is the case then you can make as many bad financial decisions as you want (obviously unless they are illegal, like money laundering or whatever). I think what you are thinking about is when other people also own a share in the company - then it is a bit less straightforward, especially if it's a public company.

Laudable courses of action, I'd encourage them.

NI kicks in at £9100 and if you're paying no corporation tax then it's unlikely that you can take a dividend to top that up to the £12570 personal tax free allowance. It's reasonable to assume that you can put some expenses like your mobile phone, travel expenses, a new laptop, etc. on the company but if you expect not to get into trouble with HMRC this is somewhat limited and, more importantly, it's not increasing your income, it's just cancelling some expenses.

So if you can live on £9k a year and be happy and comfortable, well done, kudos... But I would encourage you to think a little bit about what your retirement might look like if you live this way your whole life... money gives you options in life and while you don't need to amass a fortune, living in absolute poverty means that if life throws you a curve ball, you could be plunged into escapable debt and that is something that is very bad for your health.

Also, I'd be astonished if you manage to live without paying vat. Almost everything you or your company buys incurs vat - take a look at your receipts next time you buy anything other than food.

Practically I am sure that's true but legally as a Director I don't think you can  - you have duty to act in the interest of the company, and clearly losing money isn't in it's interest.

You are forgetting pensions

I was meaning the company isn't VAT registered, not that I don't pay VAT personally.

True, but that alone puts the effective rate down to somewhere around 15%

Yep - that's the benefit, against the cost of not being able to access it immediately.  I think that's a very deliberate move on the part of the government to encourage saving for retirement. And that's open to anyone - if your employer is happy to facilitate it, you can just take your salary in pension accrual.

But you are paying the corporation tax on profits, right?

I presume you're merely using up whatever thresholds are available and then stuffing the rest into a pension pot resulting in at most a trivial company profit/loss. You better hope there's still a 25% tax free lump sum when you come to take it out - that's a risk.

The only thing to watch is to be very sure that you can't get caught out by IR35 (which is even worse now than when it was first introduced all those years ago) because if you do get caught out, the tax/NI bill will be big and you will be too late to do any alternative arrangements that might have mitigated the amount.

But otherwise carry on.

As for charity, give as generously as you can afford to whichever causes most march your values and concerns.

Ugh! ok, I've read half the thread and realised 2 things:

1) Sounds like you put most of the profit into employer pension contributions, so this certainly has advantages and disadvantages but it's more like (as others said) deferring the tax rather than escaping it.

2) There are a _lot_ of people who don't understand to the UK tax system (or at least large parts of it) and it's leading to a lot of misleading posts.

Fun fact I discovered a couple of weeks ago (and this was one my chartered accountant actually had to go check with the specialist.... chartered chartered account?): Scotland has different income tax bands than England but because dividend tax is not devolved, the dividend bands are the same. So in Scotland the 40% income tax kicks in at £43k but if you pay yourself by dividend, the 33.75% dividend tax rate kicks in at £50k. So essentially if you pay yourself by dividend, there is a pretty huge tax saving on that £7k gap (in _addition_ to the tax saving you already make because dividend + corp tax is less tax than NI + income tax). Which is pretty silly and counterproductive.

If you pay into the pension as a _employer_ contribution then it comes off the company as an expense - pay 100% of your company's profit as a pension contribution and there is no profit left to pay corp tax on.

It's different if you do it as an employee contribution.

Yep, understood - it's just salary (as far as the business is concerned) and therefore allowable as an expense before calculating profit.  

My point is that if OP wants to take a sum of cash out of the business, he can either:

a) take it as immediate salary, and pay NI and income tax on it (but not corp tax)

b) take it as salary but paid into pension, and somewhat pay less tax on it when he eventually gets hold of it (but can't get at it right now) (ditto no corp tax)

c) let it fall as profit, pay corp tax, pay it as dividend, and pay the 8.75% dividend tax

But the original post said he was somehow avoiding corporation tax.  I'm trying to work out if this is because he's planning to follow course b) or if he's found some other way to get away with corp tax!

I was self employed - or rather director of my own company - for best part of 20+ years, and arranged things mostly as you suggest, though maybe didn't pay as much into a pension fund as I should have done - I couldn't quite see the point of investing in someone else's business when I could invest the same funds in my own. I paid plenty of corporation tax, VAT, CGT on the proceeds of the business when I sold it,  and all my employer's NI contributions for my employees, plus of course my statutory contribution to their pensions, so I don't frankly feel riddled with guilt ... I think it is widely acknowledged that being a director of a Ltd company is advantageous from a tax point of view, but to my mind that's some sort of compensation for the stress of starting a business, the risks you take with your own money, the hours you have to put in and the legal and regulatory minefields you have to cross every working day. (My Dad never understood that - when I once told him I had to go to work, 'if I don't work, I don't get paid' he laughed - having been salaried all his life he couldn't imagine such a thing.)

He said somewhere in the middle of the thread that he's doing b).

There are only two ways to get away with paying no tax at all on loads of money coming into your company and it doesn't sound like he's turning over £100 million a year and going down the fields-of-accountants-and-lawyers route, so that just leaves the money-in-a-suitcase-under-the-bed-and-being-ready-to-drop-everything-at-a-seconds-notice-and-book-a-flight-to-panama route

I've been thinking about his for a while, and I think I agree. Why not abolish NI and tax all income - salary, dividends, CGT, inheritance, gifts above a certain amount etc etc on the same progressive scale? The biggest issue we'd have would be what to do with the army of clever tax accountants who would suddenly become unemployed (and unemployable)

And I've even thought of way to get from where we are now - chaotic, ad hoc, origins back to Napoleonic wars and tweaked and gamed by the wealthy ever since - to that happy state of affairs. Start a brand new tax regime, that only applies to new entrants to the workforce (or possibly all 16 year olds). Then no one could complain of the rules being changed retrospectively, and the cost of administering 2 systems would decline quite rapidly; it would be offset by cheaper administration, a more effective tax take, and the one system would soon decline as us oldies on the old complicated rules progressively dropped from our perches.

Come on Keir, it's the silver bullet you've been looking for!

Sounds good in principle but.... isn't it inevitably going to set age groups against each other? Either young or old will be seen to be winning and over time the boundary will move through the age groups giving politicians 80 years from of bickering...!

Not if you are wealthy. I know couples who have maxed out their lifetime allowance. As they have other savings/investments ,  they only intend to use the 500k or that they can access tax free, when one passes away the other gets 750k. There will need to be a bit of creative accounting around trusts etc. but I'm not expecting their kids to be saddled with a big IHT bill. 

I can see there's the possibility of friction in certain circumstances but a) how many people show others their tax returns, and when they do how many understand it? And b) - what's the alternative? Living with the archaic chaos that has evolved to date, forever?

I don't really understand the problem.

Let's say you pay yourself £50k. Just so we have a number.

That's £12k salary and £38k in dividends.

The salary is tax free, and the dividends, as the total income falls under £50k would be 8.75%.

There's be a bit of NI for the company to pay, but I'll ignore it for now.

The dividend is post tax, so that's already got 19% corporation tax assuming you pay yourself with all your profits as dividends.

So that's about £12k tax, or 24%.

If you earnt £50k PAYE that's £7500income tax and £4500 NI. £12k total.

So it's about the same.

Have I made an error above?

No error but, as above, not my position.

That seems pretty unlikely to me - I'd verify this with your accountant. I also work via a limited company and am aware of the various options available. None of them involve paying "no tax".

To pay no tax or NI at all you would need to:

* Pay yourself a monthly salary that falls below the basic rate threshold (currently £12,570 per year)
* Pay yourself a dividend below the minimum allowance at which dividends are taxed (£1000)

However, you can only pay yourself a dividend if your company makes a profit - which means it pays corporation tax on those profits.

So the most you can earn without being liable for any tax at all is £12,570 - which is true for anyone whether they're running a limited company or not.

Assuming that those profits fall below the annual allowance for pension contributions - currently £60k.

Or pay myself a pension (as above this may be taxed in due course, but at a low rate).

Now it's clear what your plan is, I'd say it's absolutely fine and perfectly ethical.  You are choosing to forego taking the income now, putting it off till retirement age, and getting a decent* tax break as a result.  That's exactly the behaviour the govt was hoping to incentivise.

* but not ridiculous - there is very little chance that you won't be paying income tax on most of it in the end

If you feel it's too well incentivised... I'd say that's between you and your favourite charity.

I had a vaguely similar question which I discussed on here a couple of years ago, when I lost self-employed income as a result of the covid lockdowns.  The SEISS was really too generous for my particular circumctances (based off a period when I'd happened to work much harder than usual), and by accepting it I ended up a few thousand pounds better off than I had any right to expect.  But there was no mechanism to accept only part of it - you could only say 'yes I have lost income' and then the whole lot was delivered.  

The consensus here was overwhelmingly to take it, and I did.  And Mountain Rescue did very well indeed out of me that year.

But anyone can do that, whether or not you are a director of a limited company. Anyone, provided they are of the eligible age, can withdraw 25% of their pension as a lump sum tax free.

However it would have to be a pretty large sum to give you any kind of "tax free income", and if you have that kind of money it's unlikely you're going to be living the kind of lifestyle that allows you to get by without paying income tax.

Unless of course we're talking uber-wealth where you live day to day on bank loans taken out using your existing capital as collateral. Seen as you have some level of guilt regarding payment of tax, we'll assume that that is not the case here.

Well indeed, that's exactly the point of the tax-incentives around pension planning so I don't really see the issue. It's also not going to equate to any kind of significant "tax-free income", however depending on the size of lump sum we're taking about, there may be opportunities for various "low tax" investments, but it's not going to be "zero tax" unless it's blatant tax evasion.

Of course £12,570 hasn’t been considered a reasonable income for decades. It may work with your circumstances to just pay yourself pocket money and make big pension contributions, but it isn’t what you alluded to in your OP.

A couple of other well-known wheezes.

Income splitting.  Arrange the shareholding say 60 / 40 with your partner and pay dividends accordingly  and you might stay out of marginal tax.  This was challanged a few years ago by the Revenue and they lost.

Pay family members enough to get a Class 1 credit but not enough to require PAYE paperwork.  Paid my kids all the way through Uni like this.

If the family work for the Company then they can come to the annual Christmas party (ies), i.e. posh meals out.  Tax deductible and VAT recovered.

Witholding tax.  If you do any international work many countries deduct WT and you "gross-up" your invoice to cover.  Some of these countries have a double tax agreement with the UK so you can set against your UK tax.

Use your £10 overseas / £5 UK incidentals allowance when travelling.

Pay as much into your pension via the company as you can afford, 25% tax free and the rest at least defered to when you might be in a lower tax band. 

Use your £0.40 per mile allowance up to the 10,000 mile limit, find somewhere to go, a meeting in Inverness perhaps.  £4k towards running your cars.

They just sound like flat out cheating to me. Perhaps not quite illegal but at best shady.

Yes I never did any of these things aside from pension contributions, as they're clearly all bollocks and just asking for an audit.

This must be one of the most pointless threads ever.

An employee or anyone else can do all he is doing and pay no tax.

To sumarise:

Pay yourself a salary of 12k no tax

Pay yourself a dividend of 1k no tax

Pay the rest into your pension fund no tax but you wont get it until later and the fund value may have reduced, plus you pay admin fees etc then you pay tax on it when you take it out - employees can do this also.

The pension is a red herring.

He's on 13k disposable and not paying any tax. The OP clearly has no financial acumen whatsoever to bring this subject up.

Good luck with living on £1,083 a month!

A). I am the OP

B) I wasn't asking for financial advice but about concerns over paying very little tax.

C) You are wrong in various ways above.

You are not going to pay "very little tax", unless you keep your earnings below the threshold at which you *should* be paying "very little tax".

This goes for whether your income is from a salary, dividends or a pension. The thresholds may vary a little but they are never going to be so low as to cause a normal person any guilt - unless as stated above your wealth is significant enough to be doing things like taking out bank loans secured on your capital - in which case you're probably on one of Forbes' lists and shouldn't be taking tax advice from the internet.

It is little, you can either believe me or not! That seems to be option d), which is fine superficially. It still doesn't seem very fair to me.  

Please ask your accountant for an illustration, as I (and probably various other participants in the thread) would be very interested to see it.

If you bothered to read the thread (actually a reply from the OP just a few posts in) you'd see that the OP's partner is earning enough so that with his £13k tax free, the rest can be stuffed into a pension.

He's not trying to live on £1,083 a month.

Whether avoiding tax now but having the money tied up in a pension with the risk of fund values reducing and taxation (currently of 75%) on the way out and fund fees etc is the best way to go is a judgement that is affected by many things that haven't even been mentioned on the thread.

Since we don't know enough to make that judgement, saying the OP has no financial acumen is basically complete b***ocks.

And actually he wasn't asking for financial advice w.r.t. tax/pension planning, only that he was concerned about not contributing tax from an ethical standpoint and whether he should alternatively give more to charity, or otherwise, and how best he should go about that.

As you said, the pension is a red herring.

OK, I missed the "Wife with income" caveat, which the OP really should have mentioned in the first place. He's counting the "reasonable income" of his wife as his but not the tax that's paid on it.

Simple Illustration - and it is simple:

• Income to company - £50k
• Salary - £12k - no tax
• Dividend - £1k - no tax
• Leaves £37k to be put in a pension fund as employer contribution - no tax now but taxable when pension taken

MG obviously has a very generous employer who doesn't require any employee contributions - that's meant to be humorous - it's his 1 man company.

I don't think it's entirely a red herring. As things stand, I pay no NI (company or personal) yet get years added, which again doesn't seem very fair and also isn't an option if employed

I'm a tax accountant so I'll summarise it for you......

The rules are that if you earn £1,083 a month you pay no tax. Sounds perfectly reasonable to me. The year is 2023 not 1973 so if you are poor you pay no tax.

You can pay yourslef £1,000 in dividends  and not have to pay tax.....unusual for someone who earns 12k a year.

If you shove all the extra in a pension, you are not receiving it now, so why should you pay tax on it now (at potentially higher rates)? you will pay tax on it at the correct rate when you draw down from it.

You really don't need to tell me that. I know how it works.

No you dont get years added. NIC rules are different from tax rules. And your confusing private pension from the state pension which are completely different things.

You need to get some advice from someone who can explain it so you can understand it.

No you don't

That's because there's an anomaly in the NI bands where you (& the company) pay no NI but still get the contributing years counted - it's been like that for yonks. I understand it on the (low paid) employee side, but don't understand why there's an NI free band for the employer.

But then NI's stupid anyway - why is it separate from Income Tax - no logical reason at all.

You are just wrong. If you earn over £123 a week, you get NI year but pay no NI. I don't believe you are an  accountant if you don't know this

https://www.gov.uk/government/publications/your-new-state-pension-explained...

It's almost like accountants have a vested interest in keep things complex!

Not a tax accountant but been running my own Ltd for about 8 years so I think this is right -

To take a 1K dividend he'd have to declare £1234 of profit and pay 19% (leaving 1K) corporation tax (£234) so that would not be tax free

What’s your plan if you;

1. Die; or

2. Get divorced?

Well I'll be dead so not a major concern!

Pay tax, I guess.

Fair enough! My point about divorce was not that you will then lose your wife’s income.  It that you’ll potentially have a whacking great pension which if she’s got any sense she’ll take half of (unless her current income’s so good she also got a better pension than you).

Right - which excluding the 25% tax free lump sum (assuming that is still a thing when it is taken) - is all going to be taxed at the usual income tax rate anyway. I really don't see what the OP is worrying about, particularly as his wife, apparently, is taking on the tax burden.

It's not in my plans but...

If it's gone through paying higher tax no one gets it, and if it's in savings, surely the same happens?

Different mentality? 

I'm having similar conversations with Mrs J's sister.

Her and her husband were both PAYE so that doesn't complicate things. The short version is they bother wanted a family but couldn't, bought a family home on the outskirts of london in 1990s, bought another property in the Cotswolds a bit later when he was working on the runway at Brize Norton, both got pretty close to the lifetime allowance by avoid paying 40% tax. Retired early and moved back upto Carlisle, bought a 4 bed detached house for less than the Cotswold property sold for. Sadly her husband passed away in his mid 50's last year leaving her amongst other things his tax free pension pot. If she took the 25% of her pension pot tax free in November when she is eligible to she will have close to 1.5 million in the bank, in her opinion pretty much tax free. Is she entitled to that money, obviously, but it doesn't alter the fact she feels uncomfortable with the amount of tax she has paid. 

I don't see how, as the maximum that can be taken tax free is 25% of the lifetime allowance which would be 250K. Unless of course she already has 1.25M in the bank, in which case good for her.

She has  inherited his pension tax free and the profit from the house sales tax free. 

If you're loading it into a pension you've forgotten a couple of options there:

e) grow it with the rest of your pot and give it away later

f) have it taken off you when a future government decides it's time for a wealth tax

Good point. Hadn't considered that.

Good point again, but at least if you’d spent it you’d have the benefit of what you spent it on.

Even putting that aside I can’t actually see the point in doing what you are.  The only way there’s actually any tax saving is if you limit your pension drawdown to 25%, and then you’ll probably have to live for quite a few years to break even.   

I assume we’re talking about reasonable sums to even bother thinking about it, so you’re just forgoing income now to have it in retirement for the sake of a small lifetime tax saving, which you might not live long enough to actually see.

I’d rather have more income now and a bit less when I’m old/dead, even if I have to pay a tiny bit more tax on it.
 

Do you mean the pension pot? If so surely. she will pay tax on that when she draws down from it . After of course she has taken the 25% tax fee. 

If she ever gets round to claiming her pension pot yes she will pay tax on the remaining portion.

Ball park figures, 800k from his pension 500k from the profit on the house sales 200k from the 25% of her pension means she has paid no tax on 1.5 million. But you are correct if she needs that additional 600k from her pension pot she will have to pay some tax. But still a pretty low marginal rate is on on 2.1 million, which like the OP she is uncomfortable with. 

The "apart from 25%" point has come up a few times as if it's an trivial point. It means an effective tax rate of ~15% at worst, which is about half the typical rate with NI included.

I would be more practical about it.  She may live to her 90s and it means she will have choice about residential care etc. so whilst it seems a lot, it could easily vanish. 
 

I had both my Mum and Dad in care homes for the last years of their lives. You burn through what looks like a good pot of money. 

I agree.  But you have a choice about whether or not to take it. 

If you maxed out your lifetime allowance in and took the lot in one go, I think the breakdown would be something like:

Lifetime Allowance: 1073100
Tax free lump sum: 268275
20% tax on next 37700: 7540
40% tax on next 87439: 34975
45% tax on remaining 679686: 305858

Total tax 348374 giving an effective rate of about 33%

Obviously you'd have to be daft ( or been very badly advised ) to actually do that, but I'm not sure where you're getting your "worst case of ~15%" figure from.

Edit - you might actually do that if you were terminally ill and wanted to live like a king for your final days.

I was assuming not going into higher rate tax bands, so something like

£100,000 pot

25% tax free leaving £75,000

Take (say) £25,000 a year for three years taxed at  20% then die.  Total tax =0.2*25000x3=£15000

£15000/100000=15% tax.

But the company is paying tax.

Right, so that's not really "worst case", then, is it?

...also, an effective rate of 15% on a ~33K income would not likely to cause me any guilt issues. It's also some way from the "no tax at all" you mentioned in your original post, completely omitting the fact that you are also relying on your wife's income who will be taking on the lion's share of the tax burden.

Incidentally, this isn't quite true. The personal allowance is reduced by £1 for every £2 above £100K so there's no allowance at all if you earn over £125K - but since no one earning that kind of wage is going to be legally avoiding tax I assume that is not the case here.

Yep. It's a reasonable tax break, generous enough to get people to consider it, but not much more than that.  It's open to anyone and designed to encourage exactly the behaviour you're considering. 

Not many people will be fortunate enough to be ble to dump all their salary above the personal allowance onto it, but if you are, then crack on.

I haven't followed all the detail of this thread, but would point out that there's an 'annual allowance' (currently about 40k I think) which limits what you're allowed to put into a pension pot tax free every year.

60K this year. I mentioned it up thread.

Ah right, thanks. Missed that.

I was pretty surprised that you can inherit someone's pension up to the Lifetime Allowance and not pay any tax at all on it, but if those are the rules then fine. I would feel no guilt at all upon taking that, especially under tragic circumstances.

Yep; the OP isn't talking about megabucks here.  They've just realised there's a pretty tax efficient way to take a reasonable amount of money out of their business, as long as they are prepared to wait till retirement age to actually get at it.

Only up to age 75, if you die after that then it's treated as taxed income.  A significant issue in pension planning and a dis-incentive to buy an annuity.

And if I remember correctly, it's not considered part of the estate, so not subject to IHT. It also isn't usually covered by a will, a separate form needs to be completed. 

Exactly, and it's only marginally better than options open to PAYE employees. You could on £72k/year pay no tax and take £1k/month and £60k in your pension. If there were two of you on this, and you could live on £2k/month - you could put your house on interest only, pay it off at 55 (or is it 57 now) with 25% of your pension pot tax free and then draw down the rest at similar to you income stillpaying no tax. But it's a life on £2k/month for 2 of you.

There are probably some better tax strategies than undervaluing yourself and leaving money in a business without a serious investment plan. You've got to be working hard to avoid corporation tax through real growth, but ultimately unless you f**k up, you'll pay tax when you get your rewards. Yes it'll be at a marginal rate that's lower than taking an income all those years, but you've got to balance having cash now vs something maybe in the future.

One error is ignoring the employer national insurance contributions.

Another is forgetting to wind the company up after a couple of years with just under the £25k (I think) limit in the accounts where you don't pay any CGT.

There's a reason contractors don't like IR35 - it costs them a lot of money.

Whilst a lot of the advantages of using a limited company have been reduced, one major advantage that still remains is the expenses that can be claimed. A contractor working in a Ltd can claim travel, accommodation, and subsistence expenses which a PAYE employee cannot.

However, in my experience, typically Inside IR35 rates are significantly higher to compensate.

Is it an error if I did it deliberately? I said:

That made Mrs J laugh, I'm not sure why?

I agree it's a lottery and can be very expensive, but I struggle to see how a 3million+ estate would disappear and even if it did she hasn't any kids. 

Sorry to hear that, I've only experienced that with grandparents, uncles and aunties as dad pass away pretty quickly. 

At the moment mum has a income of about 25k a year, up here "nicer" carehomes are about 30k a year, nursing homes about 40k. I didn't think finding  15k a year from her much smaller estate would make too much of a dent, even for a number of years. Mrs J's mum lost her husband suddenly in her 50's as well and at the time took out insurance against carehome cost, but having looked into this they don't seem very good value even though they barely dent 3 million? Until recently my 94 year old auntie was able to live at home with care visits, basically on her income 20k she would break even on 3 visits a day. Unfortunately at the moment she is on end of life care at home, she gets 5 visits a day and someone stops overnight, the funding for this seems to be a bit of a lottery, for her it is fully funded until she passes away, that was expected to happen about six months ago but she is still with us. A friend had to fund similar care for his mum from her estate, that was expensive, especially when the overnight care had to change from “sleeping“ to “awake“ but I think even in that case it was around 10k a month. To be honest, IME, no doubt money helps, but having someone to advocate strongly on your behalf, when you are no longer able to, is far more important. 

Yes, it was an error to deliberately ignore it, because avoiding employers NI contributions is a significant benefit of contracting in this manner.

Thought you said it was about £1.5 million 

I ignored it as it's a really minor contribution the way I assumed income was paid.

Fine I'll work it out. It's £400.

But I also ignored tax write-offs like fuel etc because they are equally quite minor in the grand scheme of things and I didn't want to spend half a day factoring every minor expense and benefit on a made up scenario.

That was the bit she hasn't had to pay tax on. I did mention the 600k that is still in her pension fund, she will be able to take about 150k of that out tax free over the next 12 years, but probably have to pay standard rate tax on the rest of her pension.

The rest, which I realise I didn't make clear, is the value of her current house and other investments. 

I hope she has a good accountant then!I know I would be keeping this quiet as sometimes its not good to be open about these things on the net.

Aren't you missing the point? She hasn't done anything dodgy and like the OP is concerned she hasn't paid enough tax and has debated whether she should she contribute more? As it happens she has gone down the philanthropy route, which she has discussed it on Radio Cumbria in person. 

No., you misjudged what I am suggesting. That level of wealth suggests you need good advise to manage things correctly in the way she wants. So if she for example wants to pay the correct tax then tell them. Setting out what she wants to a good accountant or adviser  will ensure she manages it well( without turning to people who probably have not got a clue what to do). Even with philanthropy there are good and bad ways of doing it .

she has plenty of funds to get the correct advice she needs.

if an accountant goes for tax avoidance then dump the accountant and find a better one . If that is what she wants  

If your top line is a grand a week, employers national insurance contributions will be about £5k per year, add in mileage (not just fuel, you get a nominal amount that covers wear and tear as well) daily lunch, etc. and you can rack up a big difference putting it through a ltd company, and that's before you start dabbling in tax fraud with things like taking the receipt when out for dinner with friends and putting it through as client entertainment.

It's the accumulation of "minor" things that results in major financial benefits (at the expense of the taxpayer).

If that wasn't the case, there would have been no need for IR35, and contractors wouldn't have been jumping through all sorts of hoops including paying for IR35 insurance in order to try to stay outside it.

Ah, OK I did misunderstand. 

That level of wealth suggests you need good advise to manage things correctly in the way she wants.

Yes, I lsort of took over during and after probate  when her husband pass away, what was going in before was IMO pretty poor. 

Can you tell them I want to pay the incorrect amount of tax?? As it is, I think we've established as its virtually all wealth now rather than income, if she wants she can pay negligible amounts of tax. They weren't able to have kids and her sister has the misfortune to be married to me, so she has no interest in putting money into trusts etc. to avoid IHT 

Can't argue with that advise, but finding one isn't easy without a bit of knowledge yourself, me accusing the previous advisor of being a con man probably wouldn't be sensible on a public forum. 

And the most rewarding involve a more hands on approach, than anonymous donations. 

She's sort of joined the (my) family in that one brother has a sizeable workforce that is sort of in the UK charity sector and as a result an accountant that seems to understand us (apologises but that's my attempt at keeping it vague) , another spends about four months a year "on the ground' in Uganda and Ghana managing our projects there. He has been for well over a decade, so we are happy the funds are going where they should be and if they are having a positive impact. I think it linked to comments that seankenny made on the thread about having/not having kids. 

Sounds fraught. 

I can see how it might appear like that from the outside, but as you've pointed out I've probably gone into too much detail already. I think it depends very much on the relationships.

I've had to make a few difficult choices regarding my auntie this year that were sort of against medical advice, but we thought they were what she would wont . I would have really struggled without the support of my brothers. The financial decisions, meh, they have been straightforward and who's bothered. 

Unless it's changed, IR35 only allows a %age of the deemed income to be deducted as expenses (IIRC it was 5%). That 5% is woefully low - a few days training course would suck it all up.

So unless you're outside IR35, your assertion that "A contractor working in a Ltd can claim..." is very limited and one of the reasons why IR35 is so hated.

And about time too IMHO as it was regularly abused by contractors and their spouses. You reap what you sew in the tax world and contractors have only themselves to blame  when this caught up with them. 

Firstly, it used a sledgehammer to crack a nut.

And secondly, (some) contractors were surely only a small proportion of the people with companies that used spouses to lessen their tax bill. Those other (non-personal services) companies are still using that loophole.

IR35 wasn't a good way to try and close it.

HMRC will have had access to all the stats and accounts to determine what was going on and also  how people were gaming the system. It’s a bit like the now taxable benefits in kind that salaried employees now have where people use to run rings round that.

It has changed. It is no longer 5%, it is 0%.

I was specifically referring to Outside IR35 contacts. It would be unusual, though not unheard of, to work Inside IR35 via a limited company. Many contracts specifically disallow this. 

Really, wow!

You are right in that it doesn't now make much sense to use a limited company inside IR35. I was "caught" when IR35 first arrived, and at that time most contractors (in IT at least) were using limited companies - largely because the IR wouldn't accept self-employed status (not sure whether that's ironic or not).

I didn't object to being "caught" (I was in a repeatedly extended contract and was still around after some permanent employee redundancies) - but the stated aim of IR35 was to put people using a service company in the same financial position as permanent employees.

IR35 didn't do that - it put service company contractors in a worse position than permanent employees, and it was that which I objected to.

Agreed. In my experience most Inside IR35 contracts offer a higher rate to compensate for the increased financial burden but the increased logistical effort is a pain, particularly when you *additionally* have a Ltd company to handle other contracts.