CM Income Planning assumes we can choose how and when we can earn income from our work on assignment. We need to understand how we can make an informed choice
Income is allocated to earnings bands:
Lower or standard rate up to £50,270,
Higher rate £50,271 to £125,140,
Top rate above £125,141.
Your income is allocated to the earnings bands, first salary then other income. There may a tax free allowance, subject to conditions. Income is taxed at the rate corresponding to the earnings band. Most people earning a salary will qualify for the personal allowance of £12,570 and pay income tax at 20% on the remainder of the lower rate band, progressing to 40% in the higher rate band and 45% in the top rate.
The basic plan is to avoid higher rates of tax by earning a lower salary. You must be paid at least the statutory minimum wage which CM interprets as a monthly salary of £2,000 a month or £24,000 a year. This leaves £26,270 of the lower rate band to be allocated to other income. Any additional income or benefits would be taxed at 20% until all the remaining lower rate band of £26,270 has been allocated. Any more income would be taxed in the next income band at the higher rate of 40%.
There is a concession in the HMRC Guidelines for staff loans, within specified criteria, not to be treated as earnings. The plan is to request staff loan advances to be repaid from future taxed income.
Umbrella company employment costs include NIC. Your marginal tax rate is 60.8% for earnings over £125,141. (income tax 45%, NI employer 13.8%, NI employee 2%). The plan is to avoid umbrella companies.
Investors may receive dividends assessable at dividend tax rates. Dividends are allocated first to the remainder of the lower rate band, subject to a tax free allowance, the lower rate is 8.75%. This is achieved at a total income of £50,270. The higher rate of dividend tax is £33.75% and the top rate is 39.75%. The plan is to request a dividend to utilise any remaining lower rate band.
Limited Companies (PSCs) have been popular with independent contractors who take a token salary and maximum dividends from post tax profits. The PSC pays corporation tax on its profits at 19% on the first £50,000 and 26.5% on the next £200,000. Dividend tax rises to £39.75%. This is a marginal rate of 55.7%. The plan is to avoid PSCs.
Follow the CM plan and your marginal tax rate will not be more than 20%.
Income is allocated to earnings bands:
Lower or standard rate up to £50,270,
Higher rate £50,271 to £125,140,
Top rate above £125,141.
Your income is allocated to the earnings bands, first salary then other income. There may a tax free allowance, subject to conditions. Income is taxed at the rate corresponding to the earnings band. Most people earning a salary will qualify for the personal allowance of £12,570 and pay income tax at 20% on the remainder of the lower rate band, progressing to 40% in the higher rate band and 45% in the top rate.
The basic plan is to avoid higher rates of tax by earning a lower salary. You must be paid at least the statutory minimum wage which CM interprets as a monthly salary of £2,000 a month or £24,000 a year. This leaves £26,270 of the lower rate band to be allocated to other income. Any additional income or benefits would be taxed at 20% until all the remaining lower rate band of £26,270 has been allocated. Any more income would be taxed in the next income band at the higher rate of 40%.
There is a concession in the HMRC Guidelines for staff loans, within specified criteria, not to be treated as earnings. The plan is to request staff loan advances to be repaid from future taxed income.
Umbrella company employment costs include NIC. Your marginal tax rate is 60.8% for earnings over £125,141. (income tax 45%, NI employer 13.8%, NI employee 2%). The plan is to avoid umbrella companies.
Investors may receive dividends assessable at dividend tax rates. Dividends are allocated first to the remainder of the lower rate band, subject to a tax free allowance, the lower rate is 8.75%. This is achieved at a total income of £50,270. The higher rate of dividend tax is £33.75% and the top rate is 39.75%. The plan is to request a dividend to utilise any remaining lower rate band.
Limited Companies (PSCs) have been popular with independent contractors who take a token salary and maximum dividends from post tax profits. The PSC pays corporation tax on its profits at 19% on the first £50,000 and 26.5% on the next £200,000. Dividend tax rises to £39.75%. This is a marginal rate of 55.7%. The plan is to avoid PSCs.
Follow the CM plan and your marginal tax rate will not be more than 20%.