The consultant, being a shareholder and director of the company, can pay a salary at whatever rate he chooses as he is not subject to the National Minimum Wage (NMW) rules. Some of the taxed profits of the company could be paid out in the form of a dividend and up to the limit for paying tax at the basic rate, no further tax is payable and there is no National Insurance Contribution (NIC) on dividends.
Are you only contracting to one client?
There are some consultants who are running their business through a limited company but are only contracting to one client and HM Revenue and Customs (HMRC) introduced specific intermediaries legislation, commonly referred to as IR35, to ensure the contractor is in fact a legitimate contractor and not an employee of the client he is contracting to.
If an individual supplies services to a client through an intermediary, more often than not this will be a company. If that company didn’t exist, the individual would be classed as an employee of the client and PAYE and NIC should be deducted as if the individual was an employee.
HMRC Business Entity Tests
Of course this leaves the contractor uncertain about his status and whether he could fall foul of the IR35 and have to pay the further amounts over to HMRC. Therefore HMRC have recently put in place the “Business Entity Tests”.
If you would like to discuss the structure of your business arrangements or feel you need more information about IR35 and the intermediaries legislation, then please talk to a member of our tax team.
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