IR35: How to take money out of a company

I have recently started contracting and set up my own limited company. It looks like all of the income I earn is caught by IR35. How do I go about taking money out of the company?

1st October 2017

I've assumed you're not working for the public sector as new rules have been introduced which will treat these 'IR35 public sector' arrangements differently to non-public sector contracts.

The IR35 rules are designed to prevent you inserting a personal service company between your client and you. Gross payments are made to your company, which you then withdraw from the company as dividends; therefore saving income tax and National Insurance.

If it wasn't for the existence of the PSC, you would be an employee of the clients. The rules essentially ensure income from your client is taxed as salary; rather than dividends.

Income from IR35 engagements that exceed actual salary paid out and various other deductions, is deemed to be a salary received on 5th April. One of the most important deductions you can take out of the deemed salary is an automatic 5% deduction. This 5% deduction is fixed and designed to compensate you for running your company. PAYE and NIC will be due on this deemed salary. You may also be able to offset the tax paid on any deemed salary payments, to avoid being taxed twice. 

In summary, it may make sense to extract money with a mix of dividends and salary because the 5% deduction from the notional deemed salary will be available. If all remuneration is taken as salary, the 5% allowance won’t be available.

By Jo Nockels

Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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