It’s not unusual for Contractors to be offered Permanent positions. Below we have written about the main implications of ‘going permy’ for your Company and future tax position.
Will you pay more tax?
There are two really good tax advantages of contracting through a Limited Company. These are:
1. You can pay a small amount or even no National Insurance. If you go permy you will be paying National Insurance so will likely face lower take home pay. You can easily see the take home pay for a given salary at the listentotaxman website.
2. You can be strategic over how much you pay yourself and keep cash in the company rather than becoming a higher rate taxpayer.
If you take a permy role you will lose these advantages. Though you will of course gain a greater degree of job security and if you are lucky some cushy benefits (do you remember getting holiday pay?).
Should you close your company?
One of the biggest decisions you will have to make if going permy is whether or not to close your company down.
There are two main advantages of closing your company.
First, you will free yourself from the administrative chores that come with operating a Ltd company. If you leave the company open but not trading you will have to prepare dormant company accounts each year and you will also need to submit an Annual Return to Companies House every year.
The second advantage is that if you are a higher earner you can withdraw £25,000 of cash from the company as a capital gain rather than income (ie dividends). This can mean that if you are able to claim entrepreneurs relief you can pay just 10% capital gains tax to get your hands on £25,000. Even better the first £10,900 (2013-14 threshold) is totally tax free if you have had no other capital gains during the year.
The main disadvantage of closing the company is that it will be gone forever. If you want to go back to contracting you will have to start afresh with a new company.
A second disadvantage is that you have to settle all debts before closing the company. This will mean you end up paying your Corporation Tax bill long before the normal payment deadline.
The final disadvantage is that you will have to take out any cash remaining in the business all in one go. If you have less than £25,000 that’s no problem. If you have more than £25,000 you will have to take the excess as a dividend and be taxed in the normal way on a dividend (25% income tax on the value of the dividend).
If you have a lot more cash than £25,000 in the company it might be worthwhile appointing a liquidator they aren’t cheap but they will be able to ensure all cash paid out the company is in the form of capital gains rather than income.
Our advice is that if you intend to go back to Contracting in the next 24 months you will be better off keeping your company open. If your Contracting days are over then you may as well close down the company.
The transition to PAYE
From a PAYE perspective moving form your Ltd Company to a permy role is pretty straightforward. All you will have to do is give a P45 to your new employer. If you are a Caprica Online client we can prepare a P45 for you in no time at all.
Anything else to think about?
- It takes about three months to close a company (or strike-off to use the technical jargon) from the point it stops trading.
- A final set of tax returns and accounts have to be submitted to HMRC once you stop trading.
- You have to remember to cancel your VAT and PAYE registrations too.
- You will likely have to complete an income tax return for the tax year that you are part permy part Contractor.
How Caprica Online can help?
If you are a Caprica Online client we can shut down your company for you for a one-off fee of £350 + VAT. This will include making sure you are doing everything as tax efficient as possible and we will handle all the paperwork.
Alternatively if you want to keep your company going we offer an inactive company package for £30 + VAT per month. Under this we will do the necessary work to keep the company alive but inactive ready to be re-awakened whenever you want.