Reply to post: Re: Life goes on

Royal Bank of Scotland IT contractor ban sparks murmurs of legal action

Dr. Mouse Silver badge

Re: Life goes on

"if they paid themselves the day rate in full then their limited company would be required to deduct employer NIC etc.."

If they paid themselves the day rate in full, their limited company couldn't fulfil its responsibilities (e.g. paying holiday/sick pay), and couldn't even pay its expenses (accountancy fees etc). It is prudent business management to retain some profits for contingencies and other things.

When it comes to paying dividends, this is how the tax system works for businesses. Do you voluntarily send the tax you would have paid on your pension contributions or ISA interest to HMRC?

The main problem, IMHO, is the "stealth income tax" in the form of National Insurance. Both employer and employee NI are effectively just additional income tax. If these were correctly incorporated into income tax, there would be no tax advantage to paying dividends over salary. However, this would show the true income tax rate (around 45% basic) and this wouldn't be a vote winner...

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