HSMP and IT Contractors

[ViperWiper]

Hi,

I was hoping that the forum may help me with a tricky immigration question thats been bothering me for a while. I assure you that I have scanned the forum to see if this question has been asked before and found nothing similar to to what I have in mind.

Background - I am an IT professional and I have been here in the UK since Jan 2003. I had a work permit & leave to remain till 2010 and I was waiting to get ILR (like a number of you) next year. I was planning to become a freelance / contractor once I had my permanent residency sorted - primary drivers being more money. The recent changes in policies meant that I had to change my plans as well and I applied for HSMP in June this year. I still have not applied for FLR.

Scenario - I dont want to give tedious (irrelevant) details about IT contracting and Umbrella company, but for the benefit of those who don't know, a common practice for IT Contractors is to keep a very low salary - to save on income tax and the rest of the earnings are taken as dividends. I assure you that this is a perfectly legitimate way of working and HMRC is aware and therefore they have other legal tricks like IR35 up their sleeves.

For those of you who are still reading this ( I appreciate your patience) as it is getting a bit long winded, but I want to give as much information and facts before I ask the question.

What will happen if I would go contracting on a 14k p.a salary and dividends in excess of 50k? Will I have problems getting an HSMP extension? Will the Home Office understan that my low salary is not because I am doing a low skilled job - but due to tax reasons? Also, will this go against me ?? Maybe they dont like people who don't want to pay hefty taxes.

I know some of you have done the maths and they must be wondering that I have already spent 3.5 years in this country and another 2 years will take me well past ILR so why am I fretting about the extension?

I have been out of the country for a period of 6.5 months ( from Jul 03 - Jan 04) - I had a valid work permit through that period and also I have a letter from the company that says I was abroad for reasons directly related to my employment here in the UK. But just in case, I run into someone who does not want to listen, its been known to happen, and I am refused ILR then I will have to apply for HSMP extension. sigh . As I can't rule out this possibility - I need to keep HSMP extension in mind.

Thanks a million for reading this.

VW

PS - Though this is my first posting - I have read a number of postings and threads and I think this is an excellent forum.

[egoode]

There will be no problem working through a limited/umbrella company. I have just applied for the HSMP and I worked through a limited company. However it was complusory for me to show a tax return to prove I had paid the correct amount of tax as well as the accounts and bank statements for my business (I was sole director). Talk to your limited/umbrella company provider about your concerns as they may have had other people work through their companies with the same issues.

[ViperWiper]

Hi Egoode,

Thanks for your response. I have not taken the plunge as yet, I am still in the very intial process - contract hunt etc. I haven't explored the options of having my own limited company and I was thinking of using an Umbrella company like Giant.

As you have more experience in this than I have I am wondering if you can examine this hypothetical situation and tell me if its okay.
Assuming I have a daily rate of about £400 a day - then my weekly pay (before taxes is £2000). Making time for holidays / sickness etc I would probably work 46 weeks a year. So total income will be 92 k p.a before taxes.


Lets say I keep salary (thru my umbrella) as 20k (so it would cost me about 23k taking into account employers NI etc) So I have circa 70K income that is payable thru dividends. Most umbrellas companies deduct a 22% tax on it and then pay that amount. Ofcourse, the onus is on the individual to pay any additional task. Most people do not pay this tax till the tax man comes. At that point in time if you pay promptly he goes away - again, please note that this is not illegal.

If this is put in front of home office as it is - will they be upset? Or do I need to increase my base salary to make it look more respectable, the problem there is - higher the base - more tax - less benefits of going contracting.

Thanks and regards,

VW

[Wanderer]

Hi Egoode,

Thanks for your response. I have not taken the plunge as yet, I am still in the very intial process - contract hunt etc. I haven't explored the options of having my own limited company and I was thinking of using an Umbrella company like Giant.

As you have more experience in this than I have I am wondering if you can examine this hypothetical situation and tell me if its okay.
Assuming I have a daily rate of about £400 a day - then my weekly pay (before taxes is £2000). Making time for holidays / sickness etc I would probably work 46 weeks a year. So total income will be 92 k p.a before taxes.


Lets say I keep salary (thru my umbrella) as 20k (so it would cost me about 23k taking into account employers NI etc) So I have circa 70K income that is payable thru dividends. Most umbrellas companies deduct a 22% tax on it and then pay that amount. Ofcourse, the onus is on the individual to pay any additional task. Most people do not pay this tax till the tax man comes. At that point in time if you pay promptly he goes away - again, please note that this is not illegal.

If this is put in front of home office as it is - will they be upset? Or do I need to increase my base salary to make it look more respectable, the problem there is - higher the base - more tax - less benefits of going contracting.

Thanks and regards,

VW

As an ex-IT contractor myself I'd like to add if you are working effectively as an employee (as most IT contracts are - lets face it) you are not outside IR35 and cannot pay yourself small salary/big dividends and not expect the Tax man to come after you.

Steve

[deep]

Hi VW,

As far as the HSMP extension is concerned, Your basic salary does not affect you in any way.What they are concerned is your gross salary and not claiming any public benefits.

You can operate through your limited or umbrella comapny and show them the Company year end accounts and i can say they will be happy.

Deep

[busa]

As you have more experience in this than I have I am wondering if you can examine this hypothetical situation and tell me if its okay.
Assuming I have a daily rate of about £400 a day - then my weekly pay (before taxes is £2000). Making time for holidays / sickness etc I would probably work 46 weeks a year. So total income will be 92 k p.a before taxes.


Lets say I keep salary (thru my umbrella) as 20k (so it would cost me about 23k taking into account employers NI etc) So I have circa 70K income that is payable thru dividends. Most umbrellas companies deduct a 22% tax on it and then pay that amount. Ofcourse, the onus is on the individual to pay any additional task. Most people do not pay this tax till the tax man comes. At that point in time if you pay promptly he goes away - again, please note that this is not illegal.

If you are going to get 70K as dividends you would definelty have to pay more tax. Tax on dividends is higher for high income bracket. You need to check with some Accountant. Paying tax afterwards is more painfull

[egoode]

ViperWiper,

There are numerous umbrella/limited company structures and they all operate differently.

I've heard Giant are pretty good and guarantee that you won't get hit by IR35 (but I don't know how they do this)
Also try http://www.dms-london.co.uk they don't pay you dividends but "bonuses" which are taxed differently and is a good choice if you are on £400/day.
Your best bet is to talk to at least 3 or 4 companies and ask how their structure works and how much money you will take home.

Just make sure you are comfortable with the risk (as they all have an element of risk involved in them) and the level of admin that is required from you.

As for your HSMP they don't care if you earn the money through a limited company or PAYE, but usually require that you have submitted your tax return to ensure all your money has been declared and taxed accordingly.

[jeremyhare]

Hi,

I have just received my FLR on my HSMP. I work through an umbrella company (giant) and had no trouble with my FLR. I just submited my bank statements to show my income.

Jeremy

[try_hsmp]

Thanks to everybody who shared their views on IT contracting and HSMP extension.....