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
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