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I have a day job that puts me in the 40% income tax bracket. I am doing some freelance work on the side which should bring in an additional £20,000 a year and am looking for a way to avoid paying 40% income tax on the payment for that work.

A friend recommended that I set up a PCS but I have no idea of the benefits of that or how it would work to benefit me and allow me to pay less tax.

  • As you are crossing the threshold of 40% from your 1st job, you other incomes are also taxed at 40% as you have crossed the threshold. If you have a partner pay him(her) the dividend/salary. Expense whatever you spend from the business from your company account, rather than paying personally. – DumbCoder Aug 1 '13 at 8:44
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If you set up a company you can pay yourself minimum wage for the hours you work (that would be taxed at 40%) and then take the rest as dividends, which are still taxed at that rate but include a "tax credit" so the effective tax rate is 25% - see eg https://www.gov.uk/tax-on-dividends .

If you are married you can also pay your spouse dividends (they can own 50% of the shares in the company so you split the dividends equally, or whatever other split you like), although be warned you cannot also pay your spouse a normal salary unless they are actually genuinely working for the company.

More info here: http://www.contractorcalculator.co.uk/salary_versus_dividends_limited_companies_advice.aspx

Also: if you are not experienced in this yourself then I strongly recommend you consult a relevant professional (accountant or small business advisor) to be sure you are not digging a hole for yourself. In particular you need to make sure you are outside IR35 rules - if you are inside IR35 you will have to pay yourself the money as salary and can't use the dividend option.

  • Aren't dividends coming from the company after-tax funds in the UK? 20% corporate tax + 25% dividend tax end up being 45% - higher than the 40% on salary... – littleadv Jul 31 '13 at 17:48
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    Sort of, but it's explained in that second link how it works. It's complicated. – Vicky Aug 1 '13 at 11:38
  • In 2015, paying dividends to the spouse who is not working for the company will get you some very unwelcome attention of HMRC; the payment will be deemed to be made to you. – gnasher729 Apr 19 '15 at 21:04
  • @gnasher729 You are quite right, the spouse must actually be working for the company (or contributing to it in some way) to justify this setup. see eg contractorcalculator.co.uk/… – Vicky Apr 20 '15 at 8:27

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