IT Contractor Tax Limited Company Accounts Accounting

For Professional Contractors and Freelancers who provide their services through their own limited company, every allowable expense counts in reducing profits and therefore corporation tax payable.

For those that have a spouse, it may be beneficial to pay that spouse a salary through the limited company.

To pay a salary, the spouse has to do some work for the company. They have to be paid at a reasonable rate; and for peace of mind it is advisable to keep a diary of all hours worked.

There are certain factors however, that need taking into consideration:

Factors to consider

• Other salary or income in the same tax year
• Tax Codes
• Working Tax Credits
• Job Seekers Allowance
• Any other state benefits
• Personal Tax Allowances
• National Minimum Wage
• Market Rate Salary
• State Pension requirements

Other Salary or Income

An individual has a Personal Tax Allowance each year. Currently for 2009/10 it is £6,475. This means that they can earn up to this amount and not pay any on that income. Income over this amount is subject to tax at Basic rate of 20% up to £37,400 and 40% for all income over £37,400. Where a spouse is not earning any other salary or income, they could be paid a salary of £6,475 through the company thus utilising their tax free allowance.

Please note that savings interest and dividend income all count as income for tax purposes.

Tax Codes

The basic tax code for 2009/10 is 647L. If the spouse has other employment, then their tax code and allowances will be applied to that employment. You may advise HMRC that they have two employments and ask for the tax code to be split accordingly. If this is not done, the salary through the company will have basic rate (BR) tax applied (20% on all earnings).

Working Tax Credits, Job Seekers Allowance and all other State Benefits

A director of a service company would not usually have a contract of employment with the limited company. However, where a spouse is in receipt of state benefits; they would need to have a contract of employment with the limited company and be paid an hourly rate at the National Minimum Wage rates.

The number of hours worked will have an effect on JSA and Working Tax Credits so it is advisable to take advice on this before you act.

Market Rate Salary

A market rate salary is one which truly reflects the commercial rate for the job undertaken.

For example, If Mr or Mrs Spouse was paid £20,000 salary annually for completing the books which takes 5 hours a week; this would be deemed an un-commercial rate. A commercial rate would be more like, £10 per, 5 hours per week would total a salary of £2,600.

HMRC have the power to deem a salary at an un-commercial rate and can disallow it as a tax deductible expense.

State Pension Requirement

The state pension entitlement is based on the level of national insurance contributions paid through PAYE or class 2 self-employed contributions. Where a woman takes a career break to raise a family and claims child benefit, their contributions are kept up to date as the government credit their account.

Where a spouse is not working or raising children, they could earn a salary through the company of an amount over £5,720 (the threshold where they do not pay any national insurance) and there state pension requirement will be contributed to.

SSP, SMP, SPP and SAP

Employing your spouse through your company provides additional benefits under PAYE such as Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP) and Statutory Adoption Pay (SAP).

About the author

This article was kindly provided by Phil Richards from BFCA Limited Chartered Accountants.

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