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Welcome to Merin Talks Your Money, the personal finance Edion of Merin Talks Money and these bonus podcasts we talk about the best strategies for making the most of your money. Am Arion, Sunset Web and with me today as ever senior reporter and Money Just author John Staback.
Hi John, Hi, man, Hey doing.
I'm very well. Thank you.
Yeah.
Are you excited watching the bitcoin price go up? We're not talking about that today, by the way, I just want to see how excited you are.
I'm deeply excited. If excitement can be reframed as deep, deep regret and envy and simmering rage against all the other people who own it, and I don't, okay, I.
Feel they need to point out that while I am being constantly, constantly attacked on Twitter for being a little down on bitcoin, I do have.
An insurance holding. So those of you abusing.
Me on Twitter, just so you know, I share in your joy a tiny little bit, which doesn't mean I've changed my mind.
By the way, We'll come back to that another time. Now.
What we're going to talk about this week is something that I think you've heard quite a lot of chatter chatter about over the last couple of months as we've known that taxes are going to go up, and oh they have gone up.
And in this context, John, we're going to start with a trick question.
Oh okay, listeners, I'd love to know if any of you get this before John does. The answer is not the one you think it is. John, What did Nicholas Durgeon and hums the use of have in common?
No? Sorry, does this one getting edited before it goes out?
We always had it swear words? But that's it. But I'm going to give you a clip.
It's not that they were really bad first ministers of Scotland.
It's not that.
So it's not just that.
No.
Well, actually, you know what I'm going to have to see. I'm going to cheat her because I saw you tweeting about this.
You have got to stay off Twitter. You spent twit twit and more. Stops talking me on Twitter. John, leave that to the bitcoin bros. Okay, it's called following. Oh okay, sorry, anyway, The answer.
Well, they both personal services companies. Is that my ability companies and that enabled them to avoid paying some streets of income tax on the part of their income.
Yes, absolutely so, just because I know everyone loves to read from the Daily Mail Sturgeon and yourself and tax storm after setting up private companies to handle outside earnings.
So critics can't think you they are have raised.
Concerns over whether the arrangement allows the two former First ministers to avoid playing the punishing tax rates with which they clobbered hard working taxes. The setup could allow them to pay Westminster controlled corporation tax on their outside earnings
instead of the Scottish rate of income tax. Last night, Scottish Conservative chairman Craig who he said, humsy use off at Nicholas Durgeon's continuity candidate to replace her as First Minister, and now he's following her lead again by setting up a company for his outside earnings. Whoof yep, I want to rely on the Daily Mail to pick this stuff.
Uph you have to admire the tax efficiency.
Oh absolutely, If only everyone had the ability to manage their money as tax efficiently as Nicholas Durgeon and Humsy Yusef. Now, look, I think it may be that what they don't know, or maybe they do know, is that personal services company is not quite as efficient as.
They used to be.
So the question we're actually answering this week is from Nick, Can I set up a limited company to save on tax? I'm going to do here, as we're going to start by talking about what a personal service company is, and the answer is no, one really quite knows.
There's no legal definition for it.
But while we're talking about and I've actually have gone on to the House of Commons library to look this up, it's usually taken to me in a limited company, the sole or main shareholder of which is also its director, who, instead of working directly for clients or taking up employment with other businesses, operate through their own company.
Now that means that when you get paid, you're paid.
Without income tax or national insurance contributions being deducted. It goes straight into your company, as any payment for any service would.
Why is that a good thing? There are various.
Tax advantages to it. So, first thing, you can set many more expenses against the income inside a company than you can against your personal taxable income. So a lot of people spend a lot of time figuring out how to put as much of their life expenses as possible against their company. And there are gray areas all over that there's also a cash flow benefit. You know, your tax is not deducted at a so you can choose
when you take income and when you pay tax. The biggest benefit to that being that you can earn when you are a higher and popped in the company and withdraw possibly later on when you're a lower runner and subject to a lower rate of tax. And then of course you can pay yourself dividends and they are not subject to natural insurance. So there's all sorts of bits and bobs going on here.
So just to clarify, because I mean, there's definitely one way of any duty to take the lead. But basically from the outside, it sounds to me like you can smooth your earnings and you can pay a lower rate of tax than if you're a paye or not at least in the first instance.
Yes, so, and you can also do things like you have you have set up a company, you have two shareholders if you're part of a couple, right, if two shareholders, and then you can both keep your income below a certain level, maybe below fifty thousand pounds so you can keep taking child benefit, although one hundred thousand pounds that you don't get into the horrible marginal tax race that you write about all the time, John, If you haven't, by the way, everyone going look at John's writing on
this is it's fascinating and also absolutely terrifying. So the main benefit here in the first instance, as you say, is that you can smooth well the two main benefits. You can smooth the income over very long periods and to take it at the moment that most tax efficient,
al most convenient for you. And then of course, if you are a lower income taxpayer, you can do things like take the first part of your income up to the tax free allowance and then take the next bit as a dividend, so that can keep.
Down your overall tax payment.
But there are other things to say here, which is that the benefits of having a company like this have really really fallen over the last little while. So you know, obviously the dividend allowances fall. And it used to be that you could take five thousand pounds in back in I think twenty fifteen sixteen, you could take five thousand pounds in dividend before you paid a penny of tax.
Right if you added that to your income tax personal allowance, it's quite a lot that you could pull out without paying anything except for your corporation tax, which by the way, is also rising. Now your dividend allowance is down to five hundred pounds, whereas they had gone up with inflation from twenty sixteen, it would be well over six thousand pounds, six thousand, six or seven hundred pounds.
So you know that's changed.
Yeah, one point there because I hadn't Again, I didn't fully understand this sat at the time. But the reason because I remember, whenever that dividend allowance changed, small investors felt that they did the right kicking the teeth because obviously it's dividends from shares, but the actual they were kind of collateral damage from because this move was aimed at people who were putting the you know, bluntly taking
like they say, this says a loophole territory. It's a loophole because you know the government has made it ridiculously complicated. But this kind of thing is you know, disguised employment is what we're talking about. And that's why, Yes, the dividends alone, isn't it. It's not. Yes, it wasn't to target small shareholders in the first place.
It was not target share small shoholders. But there's been a lot done over the years to try and deal with the avoidance through personal companies. So we had IR thirty five, which tried to prevent disguised employment. So there was a period when an awful lot of people who were really employees of companies were paid through companies in order to reduce their their tax levels. And that obviously was you know, a fairly major tax avoidance. So IR
thirty five was put in place to prevent that happening. Yeah, and they were also no I was going to say, there used to be. There used to be really, I mean, so much you could do with the personal servitorce company because you could also constantly close it, dissolve it, and get entrepreneurs allowance over and over and over again. So there was a period when people would set up a personal services company I mean pretty much on an annual or or every second year's basis, and then they'd dissolve it.
They'd take the entrepreneurs relief paid ten percent obviously they'd already paid corporation tax, but on as little profit as they could possibly manage to make it look like they'd made and then they set up another company doing the same thing, and round and round and round they go. And back in the old days that the entrepreneurs allowance was very high, went up to ten million at one point, and now of course it's down to one million, so
that doesn't work quite as well as it did. And of course that loophole was closed, and we got to a pointe we weren't allowed to set up another company doing the same thing for a certain number of years. So little by little, all the loopholes that have allowed people to really really do very well out of personal services companies have closed.
It's not as attractive as it was. Miss maybe yes, sorry too, teams, I know you missed it. You missed another boat there.
This is why the it guys in your office and the nineties were all mented and were driving new cars every year then because there was paying absolutely no income tax even though they were on in five days a week for the same place.
Yes, yes, okay, although forget don't forget that you do pay corporation tax. So let's let's look at what happens now. So you set up a personal services company now, and don't forget that if you do that, there are costs to having a company. You have to file accounts. If you earn over the VT allounce, you're going to have
to go through all that. You have to pay an account enter either there's there's admin and cost involved here, but you set it up and you know, Nicholas Sturgeon and and HUMSI userf I'm assuming they're getting some advice here, so there must be some gain into.
It, right, So yeah, there must be some benefit.
You set them up. And maybe you have a pay income somewhere else.
Maybe maybe perhaps you're you're an MSP, I don't know, so.
You have an income somewhere else that pushes you up into quite a high tax band in Scotland. Your freelance income you put inside the company and you leave it there until you are no longer.
Receiving a pay income. Yep.
Then you can start taking out up to the basic allowance tax free, assume you don't have any gum elsewhere, and then you can take some dividends etc.
So that is an.
Example of how you can smooth your income using a company. So there's that, there's the expenses that we talked about earlier. There's the splitting income between a couple that we talked about earlier. That means you can hang on your child benefit and you can prevent yourself getting into the higher level marginal rates.
So there's all that, but the main thing still even now.
Is probably entrepreneurs relief or business asset disposal relief as it's now called. I think it became called that in twenty twenty. So even now you can still set up your company, hold the money inside it, and close it down, dissolve it, and on dissolution, on just before dissolution, you can have any distributions classed as capital gains, and then you can use your capital gains allowance, even though that's not also tiny, and then your entrepreneurs relief.
The bad news for it is worth is that that.
Too is going up, so to fourteen percent and then eventually to eighteen percent. So if you're going to be paying corporation tax at nineteen percent or twenty five percent and then you're going to be paying eighteen percent on your entrepreneurs relief, the benefits do begin to look yeah, not really as good as they were.
It's getting a bit marginal.
Also, I've read something about I mean, that is so much stuff that the government of the recent years has tried to do to make any of the tactics that you could use much much harder laboys like things like money boxing and as something I don't but that which is like not putting too much cash, shot holding too much cash and a company and things like that.
Yeah, well the company.
I mean, there are rules around the ADR business asse it I suppose really if I mean, for example, you have to be a trading company to get it.
You can't just stick a whole bit.
Of money in a company, keep it there and use it as a as an investment company that works.
Got to be trading. So there are all sorts of rules.
And I know that you know, John, when you and I first heard it out in journalism. Apart from us, I think absolutely everybody else run there and come through a personal services company where we've always been very dim about this stuff or honest one or the other.
Well, but also to be fair, the other thing is, and I will say, you know a lot of the people I mean, like the BBC is the classic example. We've seen lots of high profile BBC present us being dragged through the tax tribuneal co ops for litterally years and part of that was because basically the BBC insisted that they get paid like that, you know, like most of these people were not tax experts and you know,
didn't spend a lot of time thinking about it. And then the other promise, you know, the less high profile you were, the harder it was to then make the case that you were you know, a contractor whenever it actually did come up before HMRC. So I think, you know, it's not just I can again, it goes back to this thing of the tax system being too complicated and people kind of getting caught out despite really not really not meaning to do anything bad.
No, I think that's that's absolutely true.
And it is also true that there once a period when an awful lot of companies didn't insist on paying their contracted through personal services companies so that they didn't weren't liable for employers then I which I'm sure they'd love to love to be able to do now.
Yeah, well exactly, And you can see why. I mean, this is one reason we're talking about this just now, because people are thinking, how you can I possibly avoid you know, paying all of this you know, mad levels
attacks or avoiding marginal rates. But the problem is that, as we sort of keep saying, we We've moved from a world where tax avoidance was seen as acceptable as opposed to tax evasion, and I very much now in the world we are Anything that is in officially sanctioned by the government is eventually going to be made illegal or gray area, and you are going to end up in front of you know, hmrc FT chatchy and that could be like years and years and years of stress. And you just don't want it.
You don't.
You don't right now, John and I, I think we've covered this pretty well, but just be absolutely clear to everybody. John and I are not accountants. We are not if as it is very possible that some of you listening will know a great deal more about this than we do, in which case we would love it if you would let us know. Is there a reason to have a personal services company that John and I have missed? Is there an expense to it that John and I have missed?
If you know either of these things, do write in and let us know. And if you have further questions also, please do write in and let us know.
Anything else to.
Add John, Nope, sort you can't stop thinking about bitcoin, everybody.
It's got nothing nothing to add to personal Services.
Company because he's just sitting there kicking himself. Thanks for listening to this week's Maren Talk to Your Money. If you like us show, rate, review, and subscribe wherever you listen to podcasts. I'll also be sure to follow me and John on X or Twitter. I'm at Maren.
Sw and here is at John Underscore Steppech.
This episode was produced by Sersadi, Production support and sound design by Blake Maples. Question and comments on this show and all our shows also welcome. Our show email is Merinmoney at Bloomberg dot NAT. I should also say that John and I are experimenting with other types of social media and you will soon be able to find us both on truth social