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I think one of the main reasons contractors do this is to pay themselves dividends (instead of just salaries) - as there's no NI liability for dividends.
So instead of storing money you are storing equipment, aka capability. The old 'it must be a physical asset to be a real business' mindset. So last century
That's only a side benefit.
Take an example, a contractor gets paid 100'000 for a year. They will bill via a limited company, and due to having to pay VAT, they have to bill 120'000. They then have to pay VAT on that, but you can do that via the flat rate scheme (although this has changed recently, so somebody please correct me), so they don't actually pay the 20'000 they would if using the normal VAT scheme, they only pay 14.5%. So straight away they have a 5.5% bonus/vat saving.
Now of that 105'500, say they pay themselves a basic salary of say 20'000, using the first online calc google threw up, they'd pay 1'880 income tax and 1'433 NI. On the remaining 85'500 in the limited company, they then pay 19% corporation tax (12'245), so they end up with 69'255 left in the company essentially free from any further tax, and ultimately 89'942 left under their control.
So for that 100'000, you would only pay £15'558 in tax/NI, and that's before you consider that any travel (I.e a commute to a fixed office)/business expenses would also be treated as a tax allowance.
Now if you were to be paid that same 100'000 as an employee, you would pay £29'403 in tax, and 5'271 in NI, and of the remaining 65326, you would be hit for interest tax, and also have to pay for your commute cost.
There you have a 24'616 saving by being a contractor using a limited company compared to an employee. However as you mentioned, contractors will often avoid income tax by paying themselves the minimum wage, then using dividend payments when they need additional money, thus they save even more in tax.
I don't earn anything near that, plus I don't have a limited company at the moment (probably something I'll need to look at later in the year for liability reasons). What I'm earning as self-employed, I'm simply using to buy equipment so that if I do decide to quit the day job, I have the equipment I think I'll need for the work I'd like to do/offer.
The problem facing the government, is how do you legally distinguish between somebody running a business and reinvesting money into that business, from somebody simply using the business to store money to minimise their tax bill?
I know that, but using it to highlight how you can use it to your advantage. One of those unintended benefits it's brought to people who it was never really meant for.
If you decide to go into your business fulltime I suggest you raise your risk awareness. I'm assuming you know some lucky long term contractors and that is colouring your view!
Supportact said: [my style is] probably more an accumulation of limitations and bad habits than a 'style'.
For the record, this is precisely why I'm working on getting OpenVPN going from my router. It won't do much in the face of everything the government can access, but I'm at least going to resist as much as I can.
I'm currently looking for a router which can act as an OpenVPN client. The idea is that rather than connecting to the VPN from each machine, all traffic from the router travels over the VPN and is encrypted accordingly.
I know many who do cash in hand jobs and pay little or no tax - is that OK?
Expect more of this
Do you think the left would not do this?
It's not about squeezing "more" out of the middle & poor, it's about catching those who lie
Except for the rich.
They will still have their loopholes. Philip Green stealing £500,000,000 and apparently its legal.
This is an authoritarian move. Nothing whatsoever to do with left or right wing.
Sure, we lead the world in surveillance of our own citizens, but everybody else is a) egging us on, and b) waiting for the next iteration of the technology so they can adopt it themselves.
If they were really serious about retrieving unpaid taxes, they'd go for those making the big money. Who makes millions cash in hand? This a lip service policy that placates whoever is calling for this and that by making things worse for those most vulnerable while letting the worst offenders carry on as normal.