In an article, ironically for the BBC website, head of taxation at professional accounting body, ACCA, Chas Roy-Chowdhury, explained that the overall take tax from using a limited company for individuals may not be that different from operating under PAYE. While the biggest savings would lie with the 'employer', who does not need to pay employers' national insurance contributions (NIC).
The use of personal service companies by some public sector workers became a media scandal when Head of Students Loans Company, Ed Lester, was 'outed' as operating in this manner. In the light of this the Government took action to control the way it contracts with freelancers, ordered the private sector to sort out its own act or face the consequences and, more recently, the Public Accounts Committee launched a damning attack on this practise, singling out the BBC for particuar attention. (See: Parliamentary Committee launches attack on freelancers - Oct 2012, Shout99)
Mr Roy-Chowdhury questions whether the tax benefit is a myth by giving an example. He says take the case of employment income of £200,000; under PAYE at the varying rates, claw-back on earning over £100,000 and national insurance, the total deductions would amount to £84,653, leaving a net salary of £115,347.
Then he contrasts with someone taking £200,000 income through a PSC. With corporation tax of £40,000 and, say, the remainer taken in the most tax-efficient way of using this arrangement, through dividends, there would be a tax liability of £34,241 as income tax on their dividends, giving a total tax paid of £74,241 and a personal income of £125,758.
Although this is about £10,000 more than the PAYE worker, this doesn't take into account the costs of running a business.
Mr Roy-Chowdhury explained that the 'the real cost saving' could be with the employer, in terms of employer's NI. In the given example, an employers' NI would be £26,567 under PAYE and nothing if they are contracting as a 'client' rather than an 'employer' with someone using a personal service company.
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Susie Hughes © Shout99 2012