Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Welcome to Merin Talks Your Money, the personal finance Edion
Speaker 2: of Merin Talks Money and these bonus podcasts we talk
Speaker 2: about the best strategies for making the most of your money.
Speaker 2: Am Arion, Sunset Web and with me today as ever
Speaker 2: senior reporter and Money Just author John Staback.
Speaker 3: Hi John, Hi, man, Hey doing.
Speaker 4: I'm very well. Thank you.
Speaker 3: Yeah.
Speaker 2: Are you excited watching the bitcoin price go up? We're
Speaker 2: not talking about that today, by the way, I just
Speaker 2: want to see how excited you are.
Speaker 4: I'm deeply excited. If excitement can be reframed as deep,
Speaker 4: deep regret and envy and simmering rage against all the
Speaker 4: other people who own it, and I don't, okay, I.
Speaker 2: Feel they need to point out that while I am
Speaker 2: being constantly, constantly attacked on Twitter for being a little
Speaker 2: down on bitcoin, I do have.
Speaker 3: An insurance holding. So those of you abusing.
Speaker 2: Me on Twitter, just so you know, I share in
Speaker 2: your joy a tiny little bit, which doesn't mean I've
Speaker 2: changed my mind.
Speaker 3: By the way, We'll come back to that another time. Now.
Speaker 2: What we're going to talk about this week is something
Speaker 2: that I think you've heard quite a lot of chatter
Speaker 2: chatter about over the last couple of months as we've
Speaker 2: known that taxes are going to go up, and oh
Speaker 2: they have gone up.
Speaker 3: And in this context, John, we're going to start with
Speaker 3: a trick question.
Speaker 2: Oh okay, listeners, I'd love to know if any of
Speaker 2: you get this before John does. The answer is not
Speaker 2: the one you think it is. John, What did Nicholas
Speaker 2: Durgeon and hums the use of have in common?
Speaker 4: No? Sorry, does this one getting edited before it goes out?
Speaker 3: We always had it swear words? But that's it. But
Speaker 3: I'm going to give you a clip.
Speaker 2: It's not that they were really bad first ministers of Scotland.
Speaker 3: It's not that.
Speaker 4: So it's not just that.
Speaker 3: No.
Speaker 4: Well, actually, you know what I'm going to have to see.
Speaker 4: I'm going to cheat her because I saw you tweeting
Speaker 4: about this.
Speaker 3: You have got to stay off Twitter. You spent twit
Speaker 3: twit and more. Stops talking me on Twitter. John, leave
Speaker 3: that to the bitcoin bros. Okay, it's called following. Oh okay, sorry, anyway,
Speaker 3: The answer.
Speaker 4: Well, they both personal services companies. Is that my ability
Speaker 4: companies and that enabled them to avoid paying some streets
Speaker 4: of income tax on the part of their income.
Speaker 2: Yes, absolutely so, just because I know everyone loves to
Speaker 2: read from the Daily Mail Sturgeon and yourself and tax
Speaker 2: storm after setting up private companies to handle outside earnings.
Speaker 3: So critics can't think you they are have raised.
Speaker 2: Concerns over whether the arrangement allows the two former First
Speaker 2: ministers to avoid playing the punishing tax rates with which
Speaker 2: they clobbered hard working taxes. The setup could allow them
Speaker 2: to pay Westminster controlled corporation tax on their outside earnings
Speaker 2: instead of the Scottish rate of income tax. Last night,
Speaker 2: Scottish Conservative chairman Craig who he said, humsy use off
Speaker 2: at Nicholas Durgeon's continuity candidate to replace her as First Minister,
Speaker 2: and now he's following her lead again by setting up
Speaker 2: a company for his outside earnings. Whoof yep, I want
Speaker 2: to rely on the Daily Mail to pick this stuff.
Speaker 4: Uph you have to admire the tax efficiency.
Speaker 2: Oh absolutely, If only everyone had the ability to manage
Speaker 2: their money as tax efficiently as Nicholas Durgeon and Humsy Yusef. Now, look,
Speaker 2: I think it may be that what they don't know,
Speaker 2: or maybe they do know, is that personal services company
Speaker 2: is not quite as efficient as.
Speaker 3: They used to be.
Speaker 2: So the question we're actually answering this week is from Nick,
Speaker 2: Can I set up a limited company to save on tax?
Speaker 2: I'm going to do here, as we're going to start
Speaker 2: by talking about what a personal service company is, and
Speaker 2: the answer is no, one really quite knows.
Speaker 3: There's no legal definition for it.
Speaker 2: But while we're talking about and I've actually have gone
Speaker 2: on to the House of Commons library to look this up,
Speaker 2: it's usually taken to me in a limited company, the
Speaker 2: sole or main shareholder of which is also its director, who,
Speaker 2: instead of working directly for clients or taking up employment
Speaker 2: with other businesses, operate through their own company.
Speaker 3: Now that means that when you get paid, you're paid.
Speaker 2: Without income tax or national insurance contributions being deducted. It
Speaker 2: goes straight into your company, as any payment for any
Speaker 2: service would.
Speaker 3: Why is that a good thing? There are various.
Speaker 2: Tax advantages to it. So, first thing, you can set
Speaker 2: many more expenses against the income inside a company than
Speaker 2: you can against your personal taxable income. So a lot
Speaker 2: of people spend a lot of time figuring out how
Speaker 2: to put as much of their life expenses as possible
Speaker 2: against their company. And there are gray areas all over
Speaker 2: that there's also a cash flow benefit. You know, your
Speaker 2: tax is not deducted at a so you can choose
Speaker 2: when you take income and when you pay tax. The
Speaker 2: biggest benefit to that being that you can earn when
Speaker 2: you are a higher and popped in the company and
Speaker 2: withdraw possibly later on when you're a lower runner and
Speaker 2: subject to a lower rate of tax. And then of
Speaker 2: course you can pay yourself dividends and they are not
Speaker 2: subject to natural insurance. So there's all sorts of bits
Speaker 2: and bobs going on here.
Speaker 4: So just to clarify, because I mean, there's definitely one
Speaker 4: way of any duty to take the lead. But basically
Speaker 4: from the outside, it sounds to me like you can
Speaker 4: smooth your earnings and you can pay a lower rate
Speaker 4: of tax than if you're a paye or not at
Speaker 4: least in the first instance.
Speaker 2: Yes, so, and you can also do things like you
Speaker 2: have you have set up a company, you have two
Speaker 2: shareholders if you're part of a couple, right, if two shareholders,
Speaker 2: and then you can both keep your income below a
Speaker 2: certain level, maybe below fifty thousand pounds so you can
Speaker 2: keep taking child benefit, although one hundred thousand pounds that
Speaker 2: you don't get into the horrible marginal tax race that
Speaker 2: you write about all the time, John, If you haven't,
Speaker 2: by the way, everyone going look at John's writing on
Speaker 2: this is it's fascinating and also absolutely terrifying. So the
Speaker 2: main benefit here in the first instance, as you say,
Speaker 2: is that you can smooth well the two main benefits.
Speaker 2: You can smooth the income over very long periods and
Speaker 2: to take it at the moment that most tax efficient,
Speaker 2: al most convenient for you. And then of course, if
Speaker 2: you are a lower income taxpayer, you can do things
Speaker 2: like take the first part of your income up to
Speaker 2: the tax free allowance and then take the next bit
Speaker 2: as a dividend, so that can keep.
Speaker 3: Down your overall tax payment.
Speaker 2: But there are other things to say here, which is
Speaker 2: that the benefits of having a company like this have
Speaker 2: really really fallen over the last little while. So you know,
Speaker 2: obviously the dividend allowances fall. And it used to be
Speaker 2: that you could take five thousand pounds in back in
Speaker 2: I think twenty fifteen sixteen, you could take five thousand
Speaker 2: pounds in dividend before you paid a penny of tax.
Speaker 2: Right if you added that to your income tax personal allowance,
Speaker 2: it's quite a lot that you could pull out without
Speaker 2: paying anything except for your corporation tax, which by the way,
Speaker 2: is also rising. Now your dividend allowance is down to
Speaker 2: five hundred pounds, whereas they had gone up with inflation
Speaker 2: from twenty sixteen, it would be well over six thousand pounds,
Speaker 2: six thousand, six or seven hundred pounds.
Speaker 3: So you know that's changed.
Speaker 4: Yeah, one point there because I hadn't Again, I didn't
Speaker 4: fully understand this sat at the time. But the reason
Speaker 4: because I remember, whenever that dividend allowance changed, small investors
Speaker 4: felt that they did the right kicking the teeth because
Speaker 4: obviously it's dividends from shares, but the actual they were
Speaker 4: kind of collateral damage from because this move was aimed
Speaker 4: at people who were putting the you know, bluntly taking
Speaker 4: like they say, this says a loophole territory. It's a
Speaker 4: loophole because you know the government has made it ridiculously complicated.
Speaker 4: But this kind of thing is you know, disguised employment
Speaker 4: is what we're talking about. And that's why, Yes, the
Speaker 4: dividends alone, isn't it. It's not. Yes, it wasn't to
Speaker 4: target small shareholders in the first place.
Speaker 2: It was not target share small shoholders. But there's been
Speaker 2: a lot done over the years to try and deal
Speaker 2: with the avoidance through personal companies. So we had IR
Speaker 2: thirty five, which tried to prevent disguised employment. So there
Speaker 2: was a period when an awful lot of people who
Speaker 2: were really employees of companies were paid through companies in
Speaker 2: order to reduce their their tax levels. And that obviously
Speaker 2: was you know, a fairly major tax avoidance. So IR
Speaker 2: thirty five was put in place to prevent that happening. Yeah,
Speaker 2: and they were also no I was going to say,
Speaker 2: there used to be. There used to be really, I mean,
Speaker 2: so much you could do with the personal servitorce company
Speaker 2: because you could also constantly close it, dissolve it, and
Speaker 2: get entrepreneurs allowance over and over and over again. So
Speaker 2: there was a period when people would set up a
Speaker 2: personal services company I mean pretty much on an annual
Speaker 2: or or every second year's basis, and then they'd dissolve it.
Speaker 2: They'd take the entrepreneurs relief paid ten percent obviously they'd
Speaker 2: already paid corporation tax, but on as little profit as
Speaker 2: they could possibly manage to make it look like they'd
Speaker 2: made and then they set up another company doing the
Speaker 2: same thing, and round and round and round they go.
Speaker 2: And back in the old days that the entrepreneurs allowance
Speaker 2: was very high, went up to ten million at one point,
Speaker 2: and now of course it's down to one million, so
Speaker 2: that doesn't work quite as well as it did. And
Speaker 2: of course that loophole was closed, and we got to
Speaker 2: a pointe we weren't allowed to set up another company
Speaker 2: doing the same thing for a certain number of years.
Speaker 2: So little by little, all the loopholes that have allowed
Speaker 2: people to really really do very well out of personal
Speaker 2: services companies have closed.
Speaker 3: It's not as attractive as it was. Miss maybe yes,
Speaker 3: sorry too, teams, I know you missed it. You missed
Speaker 3: another boat there.
Speaker 4: This is why the it guys in your office and
Speaker 4: the nineties were all mented and were driving new cars
Speaker 4: every year then because there was paying absolutely no income
Speaker 4: tax even though they were on in five days a
Speaker 4: week for the same place.
Speaker 2: Yes, yes, okay, although forget don't forget that you do
Speaker 2: pay corporation tax. So let's let's look at what happens now.
Speaker 2: So you set up a personal services company now, and
Speaker 2: don't forget that if you do that, there are costs
Speaker 2: to having a company. You have to file accounts. If
Speaker 2: you earn over the VT allounce, you're going to have
Speaker 2: to go through all that. You have to pay an
Speaker 2: account enter either there's there's admin and cost involved here,
Speaker 2: but you set it up and you know, Nicholas Sturgeon
Speaker 2: and and HUMSI userf I'm assuming they're getting some advice here,
Speaker 2: so there must be some gain into.
Speaker 4: It, right, So yeah, there must be some benefit.
Speaker 1: You set them up. And maybe you have a pay
Speaker 1: income somewhere else.
Speaker 3: Maybe maybe perhaps you're you're an MSP, I don't know, so.
Speaker 2: You have an income somewhere else that pushes you up
Speaker 2: into quite a high tax band in Scotland. Your freelance
Speaker 2: income you put inside the company and you leave it
Speaker 2: there until you are no longer.
Speaker 3: Receiving a pay income. Yep.
Speaker 2: Then you can start taking out up to the basic
Speaker 2: allowance tax free, assume you don't have any gum elsewhere,
Speaker 2: and then you can take some dividends etc.
Speaker 3: So that is an.
Speaker 2: Example of how you can smooth your income using a company.
Speaker 2: So there's that, there's the expenses that we talked about earlier.
Speaker 2: There's the splitting income between a couple that we talked
Speaker 2: about earlier. That means you can hang on your child
Speaker 2: benefit and you can prevent yourself getting into the higher
Speaker 2: level marginal rates.
Speaker 1: So there's all that, but the main thing still even now.
Speaker 2: Is probably entrepreneurs relief or business asset disposal relief as
Speaker 2: it's now called. I think it became called that in
Speaker 2: twenty twenty. So even now you can still set up
Speaker 2: your company, hold the money inside it, and close it down,
Speaker 2: dissolve it, and on dissolution, on just before dissolution, you
Speaker 2: can have any distributions classed as capital gains, and then
Speaker 2: you can use your capital gains allowance, even though that's
Speaker 2: not also tiny, and then your entrepreneurs relief.
Speaker 1: The bad news for it is worth is that that.
Speaker 2: Too is going up, so to fourteen percent and then
Speaker 2: eventually to eighteen percent. So if you're going to be
Speaker 2: paying corporation tax at nineteen percent or twenty five percent
Speaker 2: and then you're going to be paying eighteen percent on
Speaker 2: your entrepreneurs relief, the benefits do begin to look yeah,
Speaker 2: not really as good as they were.
Speaker 3: It's getting a bit marginal.
Speaker 4: Also, I've read something about I mean, that is so
Speaker 4: much stuff that the government of the recent years has
Speaker 4: tried to do to make any of the tactics that
Speaker 4: you could use much much harder laboys like things like
Speaker 4: money boxing and as something I don't but that which
Speaker 4: is like not putting too much cash, shot holding too
Speaker 4: much cash and a company and things like that.
Speaker 3: Yeah, well the company.
Speaker 2: I mean, there are rules around the ADR business asse
Speaker 2: it I suppose really if I mean, for example, you
Speaker 2: have to be a trading company to get it.
Speaker 3: You can't just stick a whole bit.
Speaker 2: Of money in a company, keep it there and use
Speaker 2: it as a as an investment company that works.
Speaker 3: Got to be trading. So there are all sorts of rules.
Speaker 2: And I know that you know, John, when you and
Speaker 2: I first heard it out in journalism. Apart from us,
Speaker 2: I think absolutely everybody else run there and come through
Speaker 2: a personal services company where we've always been very dim
Speaker 2: about this stuff or honest one or the other.
Speaker 4: Well, but also to be fair, the other thing is,
Speaker 4: and I will say, you know a lot of the
Speaker 4: people I mean, like the BBC is the classic example.
Speaker 4: We've seen lots of high profile BBC present us being
Speaker 4: dragged through the tax tribuneal co ops for litterally years
Speaker 4: and part of that was because basically the BBC insisted
Speaker 4: that they get paid like that, you know, like most
Speaker 4: of these people were not tax experts and you know,
Speaker 4: didn't spend a lot of time thinking about it. And
Speaker 4: then the other promise, you know, the less high profile
Speaker 4: you were, the harder it was to then make the
Speaker 4: case that you were you know, a contractor whenever it
Speaker 4: actually did come up before HMRC. So I think, you know,
Speaker 4: it's not just I can again, it goes back to
Speaker 4: this thing of the tax system being too complicated and
Speaker 4: people kind of getting caught out despite really not really
Speaker 4: not meaning to do anything bad.
Speaker 3: No, I think that's that's absolutely true.
Speaker 2: And it is also true that there once a period
Speaker 2: when an awful lot of companies didn't insist on paying
Speaker 2: their contracted through personal services companies so that they didn't
Speaker 2: weren't liable for employers then I which I'm sure they'd
Speaker 2: love to love to be able to do now.
Speaker 4: Yeah, well exactly, And you can see why. I mean,
Speaker 4: this is one reason we're talking about this just now,
Speaker 4: because people are thinking, how you can I possibly avoid
Speaker 4: you know, paying all of this you know, mad levels
Speaker 4: attacks or avoiding marginal rates. But the problem is that,
Speaker 4: as we sort of keep saying, we We've moved from
Speaker 4: a world where tax avoidance was seen as acceptable as
Speaker 4: opposed to tax evasion, and I very much now in
Speaker 4: the world we are Anything that is in officially sanctioned
Speaker 4: by the government is eventually going to be made illegal
Speaker 4: or gray area, and you are going to end up
Speaker 4: in front of you know, hmrc FT chatchy and that
Speaker 4: could be like years and years and years of stress.
Speaker 4: And you just don't want it.
Speaker 3: You don't.
Speaker 2: You don't right now, John and I, I think we've covered
Speaker 2: this pretty well, but just be absolutely clear to everybody.
Speaker 2: John and I are not accountants. We are not if
Speaker 2: as it is very possible that some of you listening
Speaker 2: will know a great deal more about this than we do,
Speaker 2: in which case we would love it if you would
Speaker 2: let us know. Is there a reason to have a
Speaker 2: personal services company that John and I have missed? Is
Speaker 2: there an expense to it that John and I have missed?
Speaker 2: If you know either of these things, do write in
Speaker 2: and let us know. And if you have further questions also,
Speaker 2: please do write in and let us know.
Speaker 3: Anything else to.
Speaker 2: Add John, Nope, sort you can't stop thinking about bitcoin, everybody.
Speaker 3: It's got nothing nothing to add to personal Services.
Speaker 2: Company because he's just sitting there kicking himself. Thanks for
Speaker 2: listening to this week's Maren Talk to Your Money. If
Speaker 2: you like us show, rate, review, and subscribe wherever you
Speaker 2: listen to podcasts. I'll also be sure to follow me
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Speaker 3: Sw and here is at John Underscore Steppech.
Speaker 2: This episode was produced by Sersadi, Production support and sound
Speaker 2: design by Blake Maples. Question and comments on this show
Speaker 2: and all our shows also welcome. Our show email is
Speaker 2: Merinmoney at Bloomberg dot NAT. I should also say that
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