All About IR35

http://www.ir35calc.co.uk/financial_impact_ir35_contractor.aspx

Contractors who are inside IR35 pay much more tax than people who are outside, hmm?! not sure what this means and why?

Who is caught by IR35?

As a contractor you will be inspected by HMRC, on average, every 5-6 years. If you're asked to be inspected, you should take legal advice.

Your application is to be reviewed by HMRC which means all the previous contracts will be reviewed. HMRC's goal is to accuse you of a failure that might not be aware, so you must be fully prepared for the review and take legal advice.

If you are about to sign a new contract then you should immediately ask for a review to protect your own interests.

If you are caught by IR35 and receive an extra tax bill, then you may only have 3-6 months to repay 6 years of additional liabilities. This can often be very difficult and seriously affect cash flow.

Working Conditions of an Employee vs Working Conditions of a Self Employed Contractor

http://www.contractorcalculator.co.uk/contractor_ir35.aspx

The Revenue’s opinion is that if you have been working for the same Client or through an Agency for the last 2 years, then you should be treated as an employee.

http://www.contractorcalculator.co.uk/legal_advice_ir35.aspx

How to stay out of IR35?

• Get all your contracts reviewed before signing them to ensure they protect you to be outside IR35
• Define your Terms and Conditions and make sure they make you to be Self Employed in the eyes of HMRV not Employee

http://www.contractorcalculator.co.uk/determine_contract_passes_ir35.aspx

http://www.contractorcalculator.co.uk/contract_reviews_ir35_status_guide_contractors.aspx

http://www.contractorcalculator.co.uk/contractor_salary_director.aspx

http://www.contractorcalculator.co.uk/Limited_Companies.aspx

http://www.contractorcalculator.co.uk/dividends_contracting_explained.aspx

Limited Company vs Umbrella Company vs Employee

1) As a Contractor using Limited Company

Gross: + 50,000

Rate: 250 per day

Contract length: 9 months

Expenses = - 7000 (salary) - 7000 (salary) - 2000 (Travel, etc) - 1000 (accountant) = - 17000

Company Profits: + 33000

Corporate Tax (22%): -7000

Company Net Profit (Dividend): + 26000

Dividends Tax (10%) = - 2600

Dividends Credit (10%): + 2600

Overall tax paid: -7000

Overall net: 26000 + 16000 + 1000= +43000

Take home over 85% of your gross!

Any legal issues?

2) As a Contractor using Umbrella

Gross: + 50,000

...

3) As an Employee

Gross: + 50,000

Length: 11 months in a year

Tax: - 14,500

Net Salary: + 34,500

Expenses: - 2000

Overall Net: + 32,500

Take home 64% of your gross!

Fixed-Income Investments

Fixed income refers to any type of investment that yields a regular (or fixed) return.

...

Passive Income and Financial Freedom

Passive Income:

Passive income is a rent received on a regular basis, with little effort required to maintain it. Don't work for money, make money work for you.

Passive Income and Financial Freedom:

Passive income is our key to financial freedom. The more passive income we generate, the less dependent we are on our job. At one point, when our passive income exceeds our expenses, we can stop working anytime we want and still live the lifestyle we desire. That is financial freedom.

Passive Income Examples:

• Earnings from a business that does not require direct involvement from the owner or merchant;
• Rental from property;
• Royalties from publishing a book or from licensing a patent or other form of intellectual property;
• Earnings from internet advertisements on websites;
• Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service, that must be renewed on a regular basis in order to continue receiving its benefits;
• Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income.
• Build a Web Business
• 
  

References:

• http://notbythehour.com/Websites/freelance/Files/Content/72607/notbythehour.pdf
• http://www.sugarpinerealty.com/shared/fs/0070/007000011/Cycle_of_wealth.pdf
• http://zenhabits.net/2007/06/automate-your-income-to-simplify-your-life/
• http://www.lifeoptimizer.org/2008/01/07/two-simple-but-powerful-rules-to-achieve-financial-freedom/
• http://www.thesimpledollar.com/2007/04/03/the-simple-dollar-on-passive-income/
• http://geniustypes.com/five_ways_to_create_passive_income_with_little_or_no_money/
• http://geniustypes.com/passive_income_strategies/
• http://www.moolanomy.com/348/building-diversifying-and-shifting-your-income-streams/
• http://www.stevepavlina.com/blog/2006/05/how-to-make-money-from-your-blog/
• http://www.doshdosh.com/websites-you-can-create-for-profit/
• http://www.stevepavlina.com/podcasts/Pavlina-009-Kick-Start-Your-Own-Business.mp3
• http://entrepreneurs.about.com/od/gettingstarted/a/passiveincome.htm

What is Bad Debt?

Accounts receivable that will likely remain uncollectable and will be written off.

Bad debts appear as an expense on the company's income statement, thus reducing net income.

In general, companies make an estimate of bad debt expenses that might be incurred in the current time period based on past records as part of the process of estimating earnings.

Most companies make a bad debt allowance since it is unlikely that all of their debtors will pay them in full.

http://www.investopedia.com/terms/b/baddebt.asp

http://moneyterms.co.uk/bad-debt/

What is Gross Salary?

This is the gross salary you receive for the financial year (1st April - 31st March) before any tax is deducted. It also excludes any extra payments you may receive including:

• Expense reimbursements
• Bonus payments
• Payment of working over normal hours

More:

http://en.wikipedia.org/wiki/Gross_income

Understanding How Your Net Salary is Calculated

How your Net Salary is calculated?

Net Pay = Gross Pay - NIC - Income Tax

Out of your gross salary, 2 payments will be deducted:

• Income Tax
• NIC (National Insurance Contribution): contributed by employee and employer

How Income Tax is calculated?

Based on the rates of 2009-2010:

• Earning up to £6,475: No tax! (Personal Allowance)
• Earning between £6,475 and £43,875: 20% tax
• Earning £43, 875 and above: 40% tax

How NIC is calculated?

Based on the rates of 2009-2010:

• Earning between £5,720 and £43,888: 11% (Employee Rate)
• Earning above £43,888: 1% (Employee Rate)
• Earning above £5,720): 12.8% (Employer Rate)

Example1:

So imagine your gross salary is £10,000, so your NIC would be:

Employee NIC: 11% * (£10,000 - £5,720) = £471

Employer NIC: 12.8% * (£10,000 - £5,720) = £548

Income Tax: 0 + 20% * (£43,875 - £6,475) + 40% * (£50,000 - £43,875) = £9,930

Net = £10,000 - NIC - Income Tax = £8,824

Example2:

So imagine your gross salary is £50,000, so your NIC would be:

Employee NIC: 11% * (£43,888 - £5,720) + 1% * ( £50,000 - £43,888) = £4,260

Employer NIC: 12.8% * (£50,000 - £5,720) = £5,668

Income Tax: 0 + 20% * (£43,875 - £6,475) + 40% * (£50,000 - £43,875) = £9,930

Net = £50,000 - NIC - Income Tax = £35, 810

More:

http://www.i-resign.com/uk/financialcentre/tax_calculator.asp

http://www.worksmart.org.uk/tools/tax_calc.php