Tax Efficient Limited Companies
Contractors are moving more towards tax efficient limited companies.
It used to be that all IT Contractors, prior to 1999, used to use Limited Companies. The Government refers to these as Personal Service Companies where one person is the main money earner.
Then with the advent of IR35 in 1999 came PAYE Umbrella Companies.
Then came Offshore Umbrella Companies where IT Contractors send their money offshore never bringing it back again.
They receive loans in lieu of the money but never pay it back. Loans are not taxable and lapse on ones death. This way IT Contractors are able to keep 85% or more of their money earned.
New Choice for Contractors
Now there are two more categories of vehicle that contractors can use. They can use tax efficient Limited Companies.
Now that the Chancellor has taken away Umbrella Companies contractors’ right to be able to claim travel and subsistence against tax, contractors are looking for alternatives.
When IT Contractors use Ltd Companies they tend to use the model where they take a low Director’s salary. They then take as much of heir income as possible in dividends.
Now there is a new type of managed limited company which doesn’t use that model. It uses other tax efficient measures to return IT Contractors 85% or more of their money.
Contractor’s Money Stays Onshore
The good thing about this is that contractors can get the monetary advantages similar to those of offshore umbrella companies. However, the money stays onshore. It also means that they can continue to use their own limited companies.
It is the latest addition to the financial vehicles that British IT Contractors, or those based in Britain, can use.
This is a very clever innovation and can return contractors 85% of their money. Again that is without any of their money leaving the UK.
Umbrella Company Contractors Looking for Alternatives
This has severely hit the pockets of Onshore Umbrella Company contractors and dividend-model limited company contractors.
While dividend-model Limited Company IT Contractors will still be able to offset many other expenses against tax, as any business can, Umbrella Company contractors will currently be questioning whether it will still be worthwhile, financially, to use an Umbrella Company.
Currently, they pay their umbella a fee a month, which is basically, just to pay them.
However, as brolly providers were able to get them travel and subsistence expenses offset against tax it was worthwhile for them, financially, to use those brollies. That’s especially if they think they are inside IR35 which would mean that they couldn’t claim anything without it.
Now, however, umbrella company contractors will still have the fees but not the tax savings.
Many will be looking for alternatives to umbrella companies before then. Tax-efficient limited companies which don’t use the dividend model are two options that they are sure to consider.
More Information on Partnerships for Contractors
For more information on see Offshore Umbrella Companies or Onshore Umbrella Companies.