Tag Archives: Contractor Limited Companies

Capital Gains Tax and Entrepreneurs Relief

If you run a Contractor Limited Company it is a good idea to know about Capital Gains Tax and Entrepreneurs Relief.

Are you a highly skilled expat Contractor? Would you like to maximise your contract income and work towards a visa extension or visa transfer? If so Commonwealth Contractors can help!

To discuss your situation with an experienced advisor call Commonwealth Contractors now on 0800 294 4388 or Submit your Details and we will get right back to you!

Capital Gains Tax & Entrepreneurs Relief

The standard rate of UK Capital Gains Tax (CGT) is 28% (2015 / 2016). Each person has an annual CGT allowance which rises from £11,000 in 2014-15 to £11,100 in 2015-16. Thus only gains in excess of £11,100 in the year are subject to a CGT liability.

Individuals whose income means that they are not higher rate taxpayers pay CGT at the rate of 18% on that section of the gain which, if it were added to their income, would fall into the ‘basic rate’ earnings band.

Subject to a lifetime limit of £10million of such gains, a reduced Entrepreneurs CGT rate of 10% applies to ‘business assets’ such as interests in a qualifying sole-trader, partnership (either unincorporated, Limited partnership, or LLP) , or Limited company business.

To qualify for Entrepreneurs relief:

  • You must have owned the business asset for at least a year, AND
  • The asset must not be goodwill if the sale was after 3rd December 2014
  • If the business is incorporated;
    • It must be a trading company OR a holding company of a trading group, AND
    • You must hold at least 5% of the shares and voting rights, AND
    • You must be either an officer or employee of that company (or an officer or employee of one or more members of the trading group)

The requirement that it must be a trading company

  • Excludes companies that are property or investment holding companies. Running a furnished holiday let business counts as trading, but letting property on longer term tenancies does not.
  • Is assessed based on the activities of the company. To be classed as a trading company, the company must carry on trading activities and to no substantial extent carry on activities other than trading activities e.g. investment activities. If a company carries on trading activities and has no investments on the balance sheet it will qualify as a Trading Company. Once there are assets on the balance sheet which constitute investments, the company must consider the “to no substantial extent” requirement. Informal guidance suggests that a 20% threshold is used across the areas of;
    • The proportion of directors time spent on each activity (trading activity Vs Investment management/holding)
    • The proportion of the company’s income derived from each activity, (trading activity Vs Investment management/holding), and
    • The proportion of Balance sheet assets held in relation each activity (trading activity Vs Investment management/holding). In this respect
    • Large cash balances on a balance sheet can be a problem, but if the cash is not actively managed and it is derived from the trading activity it may be argued that the holding of the cash is incidental to the trade rather than a separate activity.

Entrepreneurs with companies that have significant assets may choose to take advance action so that during the 12 months running up to disposal, all the company’s activities unambiguously qualify as trading activities.

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To find out more about Commonwealth Contractors call now on 0800 294 4388 or Submit your Details and we will get right back to you!

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The Compound Effect of Corporation Tax & Personal Income Tax

Life would be far simpler if dividend Income was subject to tax at the same rate as earned income, and you got a personal tax credit for the corporation tax paid by the company before it declared your dividend.

Unfortunately, this is not how it works. Instead dividends are taxed at a lower rate than earned income, but there is no gain to you as you do not get full credit for the corporation tax paid by the company.

Are you a highly skilled expat Contractor? Would you like to maximise your contract income and work towards a visa extension or visa transfer? If so Commonwealth Contractors can help!

To discuss your situation with an experienced advisor call Commonwealth Contractors now on 0800 294 4388 or Submit your Details and we will get right back to you!

Rates of Tax on Dividends & Earned Income

The tables below show the rates of tax on dividends and on earned income (Tax rates on Earned income and Interest (bank interest, bond coupons) for 2015 / 2016)

Income Tax Rates (2015/2016) for someone under 65 earning under £100,000 per annum

Description

Rate of Tax

Paid on Earnings

Personal Allowance 0% £0 – £10,600
Basic Rate 20% £10,600 – £42,385
Higher Rate 40% £42,385 – £100,000

 

Income Tax Rates (2015/2016) for someone under 65 earning over £121,200 per annum

Description

Rate of Tax

Paid on Earnings

Personal Allowance 0% N / A
Basic Rate 20% £0 – £31,785
Higher Rate 40% £31,785 – £150,000
Top Rate 45%% Over £150,000

 

UK Tax Rates (2015/2016) on Deemed Dividend Income for someone under 65 and earning under £100,000 per annum

Description

Rate of Tax

Paid on Deemed Dividend

Personal Allowance

0% £0 – £10,600

Basic Rate

10% £10,600 – £42,385

Higher Rate

32.5% £42,385 – £100,000

UK Tax Rates (2015/2016) on Deemed Dividend Income for someone under 65 and earning over £121,200 per annum

Description

Rate of Tax

Paid on Deemed Dividend

Basic Rate

10% £0 – £31,785

Higher Rate

32.5% £31,785 – £150,000

Additional Rate

37.5% Over £150,000

**If you have earned income / interest as well as dividend income, it will affect the rate payable. You only have a single basic / higher rate allowance for use with all types of income.

Tax Credits on Dividends

The above table details the tax on ‘Deemed Dividend Income’.

If you receive a dividend from a UK company, it carries with it a tax credit (in partial recognition of the corporation tax paid by the company).

Dividend Paid to You

Tax Credit

Deemed Dividend Income

Cash (£) £1 £0.11 £1.11
Value (%) 90% 10% 100%

** Figures are rounded to the nearest penny. Actually the £0.11 recurs. For full accuracy start with £1/0.9)

Tax Paid – Basic, Higher & Top Rate Taxpayers

Basic Rate Taxpayer receiving a £1 cash dividend and £1.11 deemed dividend income

Tax Liability = 10% of £1.11 = £0.11

Tax Credit = £0.11

Tax Due = None (i.e. the tax liability is covered in full by the tax credit)

Higher Rate Taxpayer receiving a £1 cash dividend and £1.11 deemed dividend income

Tax Liability = 32.5% of £1.11 = £0.36

Tax Credit = £0.11

Tax Due = £0.25

Top Rate Taxpayer receiving a £1 cash dividend and £1.11 deemed dividend income

Tax Liability = 37.5% of £1.11 = £0.41625

Tax Credit = £0.11

Tax Due = £0.30625

Combined Effect of Corporation Tax & Personal Tax

N.B. All these tables use a corporation tax rate of 20%. This is the main rate in 2015-16;in earlier years it was the Small profits rate (payable on profits up to £300,000 pa;higher levels of profits attracted higher rates of corporation tax, but by 2014-15 the difference between the main rate and the Small profit rate was only 1%)

Breakdown

Basic Rate Taxpayer

Higher Rate Taxpayer

Additional Rate Taxpayer

Pre Tax Profit

£100.00 £100.00 £100.00

Corporation Tax Rate

20% 20% 20%

Post Tax Profit paid
as Dividend

£80.00 £80.00 £80.00

Deemed Dividend Income

£88.88 £88.88 £88.88

Tax Credit

£8.88 £8.88 £8.88

Tax Rate

10% 32.5% 37.5%

Tax Bill

£8.88 £28.89 £33.33

Dividend After Paying
Basic Rate Tax

£80.00 £59.99 £55.55

For those close to the £150,000 top rate threshold, and those close to the £100,000 gross earnings point at which they loose their personal allowance (and thus suffer in effect a 60% marginal income tax rate), the ability to structure earnings as dividends is particularly valuable as the deemed dividend income is less than the underlying corporate profits.

For a company paying corporation tax at the small company rate, pre-tax of 20% profits are c12.5% higher than deemed dividend income. For a company paying corporation tax at the Large company rate of 25%, profits are c20% higher than deemed dividend income.

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To find out more about Commonwealth Contractors call now on 0800 294 4388 or Submit your Details and we will get right back to you!

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Income Tax on Earned Income

As a Contractor you need to pay Income Tax on (1) PAYE earnings received via an Umbrella Company, OR (2) on Salary and Dividends received via your own Contractor Limited Company. (more…)

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IR35 Investigations

An IR35 Investigation is a Contractor’s worst nightmare. The HM Revenue and Customs may take months going over company records, assessing service contracts, speaking to client representatives and going in detail through financial transactions. (more…)

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IR35 Deemed Payment

If a contract you’re working on is considered to be Inside IR35 you must pay full Income Tax and Class 1 National Insurance deductions (Employers and Employees) on salary payments made throughout the year. (more…)

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IR35 Expenses

If your Contract is Outside IR35 you have freedom to claim many more business related expenses than if your contract were Inside IR35. Claiming expenses is a great way to reduce your Income Tax & National Insurance liability. (more…)

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Daily Working Arrangements

IR35 Status is not solely dependent upon contract terms and conditions. Actual ‘working arrangements’ are now one of the most important factors in determining whether someone is or is not caught by IR35. (more…)

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Other Contract Factors

Aside from the main factors (Right of Control, Substitution and Mutuality of Obligation) there are a number of other contract factors that should be addressed before an agreement is signed. (more…)

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Right of Substitution

It is important to retain the contractual ability to provide a Substitute, even if you never actually provide a substitute in practice! (more…)

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Mutuality of Obligation

Mutuality of Obligation is a key point in an IR35 contract. If a ‘Mutuality of Obligation’ exists you will certainly be Inside IR35. Therefore it’s very important that they agreement if for a fixed period after which time both parties go their own way. (more…)

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