I am an IT contractor who operate through a one man Ltd company. I am about to go into an IR35 caught contract for a few months and am planing the tax implication.
In order to minimise the overall tax hit of this particular contract, could I pay a minimal salary (~ £8k) just to avoid NIC and income tax and pay the rest of the balance all into my personal SIPP?
Will this relative large pension contribution be allowable for corporation tax? I am aware there is a £50k cap and this contract is below that value.
Thanks
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confused indeed!
You are correct in thinking that you can deduct any salary and pension contributions from the IR35 caught income when you calculate the "deemed income" at the end of the year.
Actually though I'm wondering why you are not already paying yourself a minimal salary to get the maximum tax relief? Are you paying yourself solely through dividends at the moment?
Contributions paid from your company into your pension scheme are 100% deductible for corporation tax. You do have to be a bit careful though as you are a director and major shareholder, HMR&C says for it to be tax deductible it must be “in line with a contribution that would have been made for an unconnected employee in a similar situation.”
I think in general they look at the total package (salary + pension) in relation to the work done so you'd probably be ok with this - I would just suggest getting your accountant to check for you.