Have the changes to the dividend taxation completely changed the picture re IR35?
Before the changes it was important for contractors to try and fall outside IR35 so they could pay themselves with dividends and save national insurance.
After the changes does it really make much difference any more or is it still worth trying to make sure the contractor tries to set things up so they fall outside IR35
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Good Question
I'm probably in a minority of one but, as the OP has inferred, the effect of carrying out a deemed remuneration calculation due to IR35 will be counteracted by the loss to HMG of the new dividend tax.
I believe the decision to keep IR35 is a purely political one and based upon HMRC's paranoia about contractors forming limited companies to minimise their tax bills. Anyone working at the coal face will know that few taxpayers incorporate for these reasons.
IR35 would still be a disaster for many ...
What about those who only draw a tax efficient amount (say £40 - £45k) per annum but earn £100k. Best for them to remain 'IR35 confident' I think!
The new dividend rules have obviously changed the landscape but I think it is more about choice of earning vehicle than IR35 per se. If you are earning good money AND you need to draw it then a PSC is probably no longer worthwhile.
Are you asking the question
Or have you done the sums?
I don't really think this is an open ended question. Some calculations on different rates and turnover figures and you have a precise answer!
They say that the new dividend rules are unrelated to IR35, i.e. it's here to stay, but I can't help thinking HMRC will be even less inclined to attempt to challenge IR35 statuses in the future. Since the tax benefits of incorporating have been reduced, so have HMRC's potential gains from future IR35 cases?
Steve Holloway makes a good point...but my view is that the changes to dividend taxes are to some extent admitting IR35 has failed, so attacking from a different angle.
Whilst it does mean both myself and our typical clients will be worse off, I think it's a good thing. Uncertainty is worse than slightly higher taxes IMHO.
I think IR35 will remain a problem, there's more for HMRC to collect though the deemed payment, Employer's NI, and the percentages are higher. I can't see them disregarding IR35 until an alternative is found, which will probably be just as difficult.
Salary v Salary/Dividend Mix under new dividend rules calculatio
Following up JCreswell's post I have done some sums based on the new divi rules.
Could someone please check if they look about right? It looks like still a good advantage to the divi/salary mix at medium levels of income.
Assumptions re 16/17
60,000 profit before directors take; no employers NIC allowance claimed. NIC thresholds of say 8,200 and 43,000; income tax threshholds 11,000 (Tax free) and 43,000. (Higher Rate)
Alternative 1
If takes all profit out as salary in 16/17
Salary 53,719
Employers NI (53,719 - 8200 x 13.8%) = 6281
Employees NI (53,719 - 43,000 x 2% = 214) + (43,000 - 8,200 x 12% = 4,200) Total 4,414
PAYE (32,000 x 20% = 6400) + (53,719 - 43,000 x 40% = 4,287) Total = 10,687
TOTAL TAX & NI = 21,382 (6,281 + 4,414 + 10,687)
Alternative 2
If split between basic salary and dividends in 16/17
Corporation Tax (60,000 profit - basic salary 8200 = 51,800 x 20%) = 10,360
Salary 8,200 Tax Free
Available for cash dividend (60,000 - 8,200 - 10,360) = 41,440
Tax on dividends
First 2,800 tax free (11,000 personal allowance less 8,200 salary)
Next 5,000 dividends is tax free (new dividend allowance)
Next 27,000 of dividend is taxed at 7.5% = 2,025
Balance of dividend of 6,640 (41,440 - 2,800 - 5,000 - 27,000) taxed at 32.5% = 2,158
TOTAL TAX = 14,543 (10,360 + 2,025 + 2,158)
So to answer my original post (!!) it is still worthwhile to be outside IR35 at this level of income.
I am still quite new to this profession so if someone could verify I have got this right I would be very grateful
I'm not offering to check your workings, but I worked out that it was still just about worthwhile at most levels below £100k of earnings, just a lot less worthwhile than it used to be. Clients with the financial flexibility to leave funds in the company and manage their dividend levels will benefit more than those who need to take all earnings out immediately. I think you have to go to fairly high earnings (over £150k from memory, but I've not checked back to my workings) before you might seriously consider disincorporation.
This is obviously all very generalised and everyone's circumstances are different, and it's looking at only one factor - it's not all about tax.
One thing you've not included accountancy fees, which will be higher for a limited company than a sole trader.