I am new to the contracting game in the UK, but I haven't met a software contractor yet who isn't using this approach. My accountant even recommended it to me when I set up. It is definitely a non-trivial tax saving.
Do you pay yourself dividends from your company? Or do you use your profits to increase your director salary so that you pay tax at the same rate as a full-time PAYE employee?
Not meaning to call you out personally on this, but I want to highlight that "tax avoidance" is a weasel word. Most people can and do optimise their taxes if the law allows it and don't consider themselves to be "avoiding tax" or acting immorally.
I didn't say anything about avoidance, so I'm not sure your questions about dividends etc were directed at me.
At the turn of the century, it was common for software developers in the UK to leave their job on a Friday and then show up to do the same role at the same desk on the following Monday but suddenly they were a LTD company acting as an independent contractor. IR35 sought to put an end to that. It didn't apply to genuine freelancers, although there were risks.
And, I'm not sure I understand what you mean about not meeting a software contractor who isn't taking that approach ... as that approach is the very definition of software contracting :)
Ah, my apologies. I got you mixed up with the parent comment poster.
To explain anyway: As a contractor with a limited company, I have two options when it comes to moving money from my company to my personal account.
1) Set my salary to be the same amount as the money I've earned from contracting, thus paying the same amount of tax as a "regular" PAYE employee who works full time
2) Set my salary to be minimum wage and pay everything left in my company account as a dividend, resulting in paying less tax.
My point is that option number 2 is "tax avoidance exploiting legal loophole" or "sensible tax practice" depending on how you want to frame it. Businesses will use whatever legal options they have to pay the least amount of tax, including small businesses (although small businesses might not even consider that they're already doing it).
But have you done the calculation on option 2 to see what you will end up paying in tax (Both corporate as well as personal income tax) when you do pay out those dividends?
You will realise that you have not "avoided" any tax really compared to a normal salaried employee due to not being able to reduce your corporation tax in the way other big organisations do.
Accountants make it sound really good but when you get down to the actual tax being paid you are not saving much, if any given the new rules implemented in the last couple of years.
Have a look at the example that I have shown as a reply to your parent comment. I would be very interested to hear your take on this.
Accountants keep on recommending this method for some reason but honestly if you do the tax calculations yourself you realise that you are not much better off.
It used to be the case that you were better off but the last 5 years the options for UK limited Company contractors have been reduced to a point where the running costs of the company combined with the taxes bring you to effectively the same amount of tax paid as a permanent employee.
