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Ask Your Own Question, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 5152
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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British citizen, getting into an open ended consultancy contract

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British citizen, getting into an open ended consultancy contract with a Norwegian company. all work overseas but resident in UK. They'll pay on invoice. What should be the most tax efficient structure for me? Do I need to register as self-employed? should I set-up a company? what are my options?
Hello and welcome to the site. Thank you for your question.

Please expand on the consultancy contract in terms of financial rewards, likely annual income.
Are you currently employed of self-employed?
Do you file a tax return at present and/or do have a UTR number (10 digit unique reference number).
Customer: replied 3 years ago.

I was employed till October 2014 and hence have a UTR. I have filed tax returns as an employed person since 2008. I have not been employed since October 2014.

re the consultancy contract; it will be a monthly payment of £20,000 and an annual performance based fee of £60,000.

Thank you for your prompt reply.

I will revert to you shortly with my views on options.

Many thanks
Customer: replied 3 years ago.

Many thanks.

Thank you for your patience

The options available to you are

Sole trader (self-employed) or form a Ltd company

As you are already registered for self assessment and have a UTR number you would have to notify HMRC of your self employment within 90 days of commencement and add supplementary pages covering income from self employment with your tax return if wself emplyed route were to be taken.

Based on tax rates and allowances etc for 2014-15

As a sole trader your profits would be taxed at your top slice rate whether you draw them or not.

Income tax on income after allowances ....

first £31,865 at 20%, £31,866-£150,000 at 40% and over £150,000 at 45%

Profits would also be liable to NIC Class 4 if your income was UK based. If all of your self employed profits were from overseas based operation then you would be exempt from paying Class 4 NIC.

Here are NIC rates for tax year 2014-15

Profits between £7,956 and £41,865 at 9%

Profits above £41,865 at 2%

In addition, you would be paying NIC Class 2 at a flat rate of £2.75 per week.

You file personal tax return and report your self employment profits on supplementary page SA103.

Accounting reporting requirements are not governed by Company Act legislation and are not that strict.

The other option would be to operate as a LTD company.

The accounting and reporting requirements are governed by Companies Act 2006 and Financial reporting Statements (Accounting standards).

Company accounts are prepared on an annual basis. You pay Corporation tax at 20% on profits up to £300,000. Tax is due nine months and a day after accounting period end. CT return is due 12 months after end of accounting period. Say the company was formed in Mar 2015 and the year end is Mar 2016 and annually thereafter, your first CT would be payable no later than 1 Jan*****returns due by 31 Mar 2017. You have flexibility on salary/dividend mix and you don't have to distribute all taxed profits as dividends.

Dividends are taxed at 10%, 32.5% or 42.5% as the top slice of your total income.

There are other HMRC requirements e.g PAYE and you still have to file a personal tax return.

I have explained to you the two alternatives.

You would be best advised to seek consultation with a good accountant before you decide which route to adopt. He would be able to also advise you on costs associated with accountancy services and other associated regulatory costs.

As far as VAT goes ... it would be advantageous to register for VAT if most of your customer base is VAT registered. Otherwise, to remain competitive you make have to eat into your profit margins. You would certainly save money by reclaiming VAT input on your expenses and purchases. You may have to do some what if exercises to see if it is beneficial to register for VAT.

Comparison of tax liability on profits of say £140,000

As self employed

As the net income is above £100k then personal allowance is reduced to nil and all income becomes taxable

31,865 @ 20% = 6,373

108,135 @ 40% = 43,254

Total tax payable (6,373+43,254) = £49,627

As LTD company

Salary say 10,000

Profit before tax £140,000

CT @20% = £28,000

Profit after tax = £112,000

Dividend paid = £112,000

Tax credit = £12,444

Gross amount (112,000+12,444)= £124,444

Income tax payable

10,000 @20% = 2,000

21,865 @ 10% = 2,186

102,579 @ 32.5% = 33,338

Total tax (2,000+2,186+33,338) = 37,524

Tax payable after tax credit (37,524-12,444) = £25,080

Total tax payable (25,080+28,000) = £53,080

If you were to distribute all profits after tax as dividends then you are better off being self employed rather than trading through LTD. On the other hand, you may draw down dividends on a needs basis and retain some of the taxed profits in the business, in this case it may pay to conduct business through LTD company.

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 3 years ago.

Many thanks for your detailed response. So as a sole trader, if the taxable income is £240,000, am I right in calculating my income tax liability at circa 39%, given the tiering?

Thank you for your reply.

Tax on taxable income of £240k would be

31,865 @ 20% = 6,373

118,135 @ 40% = 47,254

90,000 @ 45% = 40,500

Total tax (6,373+47,254+40,500) = £94,127

Effective rate 39%

I hope this is helpful. and other Tax Specialists are ready to help you
I thank you for accepting my answer.

Best wishes.
Customer: replied 3 years ago.

Thank you for your advice.