How you pay yourself as an IT contractor

The advantages of having a company or other payment vehicle as an IT contractor mainly accrue from having more flexible payment options, in particular in regard to the payment of a contractor’s salary and dividends from the operational entity of your choice. This is likely to enable more effective tax planning for you and your family than going down the standard career path.

Money that is paid into a company usually by means of raising invoices and having them paid, but also the depositing of owner Equity or Debt Financing is slightly restricted in terms of how it can be subsequently paid of the company. On dissolution (the winding up or formal closure of the company) from a Companies Act perspective, funds are transferred out of the company using a very different process and format to normal monthly and annual flow of monies to the business owners. This article only deals with the latter.

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Owners & Shareholders

Owners of a company are deemed so by the fact they own shares in the company. Shareholders, should the Director(s) of the company deem it to be suitable, receive their rewards primarily by means of regular dividend payments. These are paid out of any post tax earning in the company and are also taxed in the hands of the recipient, although at lesser tax rates than salaried earnings. In the normal course of affairs share ownership would also bring the owner of Shares gains through the increase in the value of the shares if they are listed on a tradable exchange, or via an agreed valuation mechanism such as an Accountants report if they are unlisted. Such gains are taxed under Capital Gains Tax codes and rules, but unless your IT consultancy business expands such that the business and its name/reputation/status in the marketplace becomes of value in its own right, Companies set up for Consultancy purposes generally don’t have value outside of the fees paid into them, net of taxes and expenses.

It’s advised too that a certain amount of income accruing to a contractor is taken via being an employee (via having a valid IR35 compliant contract) and taking a certain amount as a contractor’s salary, to match with Tax Free allowances usually. However, each person’s Tax arrangements are different and often there are family and/or non-work income and gains to be considered when deciding on the exact amounts to pay from a company and when. Specific guidance is therefore strongly advised.

It’s useful to understand what your contracted counterparty’s view is with regard to expenses. If a Contractor has to work abroad or travel outside of the normal place of work then it’s usual to be allowed actual expenses incurred and some sort of per diem subsistence allowance but it is worthwhile to understand what the process is for the reclaim of these from your contract counterpart and to know what proof of expenses and forms need to be completed to be reimbursed in such instances.