The new tax year is nearly upon us so it is almost time to process salaries for the new tax year taking in to account the changes the government introduced, many of which impact contractors and freelancers.
With the new dividend tax, contractors and freelancers operating through a Limited Company need to be aware that their personal tax liability is likely to increase, so it is now more important than ever to ensure that you operate in the most tax efficient way possible.
A monthly salary of £671 per month (£8,052 per annum) is now the optimum salary and will mean that there will be no Tax or National Insurance (NI) payable on your salary. The same salary is recommended for spouses too.
Although this salary will not incur any Tax or NI you will still receive the qualifying year towards your state benefits (including state pension) as your earnings are higher than the Lower Earnings Limit of £112 per week. This also means that there’s one less task of making a PAYE/NI payment to HMRC.
On the basis that you do not have any other income and you have a standard tax code of 1100L you will be able to receive approx. £7,948 in dividends completely tax free and £27,000 basic rate dividends at a rate of 7.5% (£2,025). Any dividends you take in addition to this will be taxed at 32.5%.
Due to the removal of the employment allowance for companies taking a higher salary is no longer more tax efficient for Limited Company contractors where the director is the sole employee. If however you do have employees (and HMRC do not restrict this if the employee is a spouse in the Budget on March 16) then a salary of £916 per month (£10,992 per annum) will be more tax efficient making an additional saving of approx. £235 meaning this will be the optimum salary for directors. In this instance we would still recommend that spouses would have the lower salary of £671 per month to avoid any monthly PAYE/NI payments throughout the year.
Please note that HMRC are going to be levying penalties on those companies with less than 10 employees who do not comply with the RTI rules this year, so it important that we get this right from the start. In previous years the rules have been relaxed for smaller companies.
When processing salaries for our clients we will also provide you with tax planning tools. This will allow you to estimate what your personal tax liability will be for the 2016-17 tax year in advance so that you are not left with any surprises.
Look out for more updates from us which will include tax planning tips for contractors to consider before the end of the tax year.
Our all-inclusive package for contractors is just £85 + VAT per month and includes unlimited support from your own dedicated accountant to ensure that you are operating in the most tax efficient was possible. Call us today on 0330 024 0406 to find out more.