Contracts caught by IR35 (inside)
Your salary will be based on cash received from contracts during year ended 05 April each year less allowances for specific items like travel, subsistence, Professional Indemnity Insurance and pensions. In addition you also receive a general 5% expense allowance that is intended to cover other costs like training and accountancy fees.
Based on the forecast of your company’s income, TRAFALGAR can calculate an appropriate salary to be paid monthly. Then each April we calculate the final IR35 tax liability and advise you accordingly. Any adjusting payment must be made by 19 April.
Contracts not caught by IR35 (outside)
If your contracts are assessed as not caught by IR35 (outside), you have the flexibility of setting your director’s salary at a level to suit your own requirements.
The choice of an appropriate salary is yours but we do not recommend going below a salary of £12,000pa gross to avoid any possible problems with minimum wage issues. A more conservative option can be a salary around £24,000pa gross and may be perceived as more ‘reasonable’.
Depending on their requirements, some directors elect an annual gross salary anywhere between £15,000 and £20,000 whereas others require more than £24,000 in order to justify pension contributions or lifestyle for example.
Please Note: You can adjust your salary level to suit changes in circumstances and status.
Net Pay arrangement
Once you have decided on a salary figure we can calculate the monthly net equivalent of your annual pay. Provided funds are available, we recommend you take the same level of net pay each month because in this way, the directors’ National Insurance (NIC) calculation is ‘equalized’ over the whole year. As an anti-avoidance measure directors’ NIC is calculated on an annual basis. If this process is not followed, even at the same level of gross pay, a director’s net pay can vary each month. This is not the case for normal employees.
Please note: In a full tax year, there is no difference in the amount of NIC payable between directors or employees.
Paying your salary
Once you have decided on a salary, we recommend you make a standing order payment from your business bank to your personal bank account for a regular net salary at the same time each month.
A pay summary and HMRC PAYE payment instructions will be supplied to you quarterly, in July, October, January and April.