I have a friend you works on a self employed basis within a limited company structure. He grosses on average about £60k p.a. but isn't great with his finances. I'm trying to think of ways that we could save money but I'm not overly familiar with his set up.
I know that one way of saving on tax and NI would be to pay himself in dividends as you don't pay NI on dividends with a lower proportion in Salary (to benefit any state pension). Am I correct in thinking this? Can anyone offer me any advice re thresholds and how this could potentially benefit him? How much should be paid in salary / dividends (the mix/ratio).
He doesn't employ any staff but he is a Ltd company so would he pay Class 1 NIC I think?
Can see there would be considerable savings through paying a dividend.....
Limited Company Directors
Unlike sole traders, for tax purposes, if you are a director of a limited company, you are an employee of the company. You are therefore liable to pay Class 1 NICs on your earnings. The limited company is also liable to pay Class 1 NICs as your employer.
Employees (Primary Class 1 Contribution) pay 12% on earnings between £146 and £817 per week, and 2% above £817 per week [2012/13].
Employers (Secondary Class 1 Contribution) pay 13.8% on earnings above £144 per week [2012/13].
These NIC deductions should be paid to HMRC by the 19th of each month, unless payments are low, where you may be able to pay quarterly.
Limited Company directors and other employees may also have to pay Class 1A NICs for benefits in kind such as company car provision. Your accountant will declare such benefits each year on your P11D form.
But the likelihood is that the person will from the sound of it be caught under IR35 legislation meaning that of the £60k any dividends could only be paid out of 5% of that after all other costs of running the company such as accountants fees.
So, the remainder of £3k after non employment expenses. The other £57k would have pension contributions and normal expenses such as mileage allowed against it (provided that the director will not work at a site for more than 40% of their time in a two year period. As soon as they know that they will work at the site for more than that then no travel expenses are allowable (even if the contract eventually does not last the two years)).
One additional point. The person is a director / employee of their own limited company and one should never use words like self employed in relation to them as that just gives the powers that be ammunition for their arguement against one person companies.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
A lot of he's work is on location as he's a boom operator on film sets. He spends a lot of time in Europe so he is never in one place for more than 2 years. That should help re claiming travel etc..
