{"id":173,"date":"2021-02-15T02:07:28","date_gmt":"2021-02-15T02:07:28","guid":{"rendered":"https:\/\/guide.no-worries.co.uk\/?post_type=ht_kb&#038;p=173"},"modified":"2021-02-15T02:07:28","modified_gmt":"2021-02-15T02:07:28","slug":"switching-from-contract-to-permanent","status":"publish","type":"ht_kb","link":"https:\/\/guide.no-worries.co.uk\/index.php\/knowledge-base\/switching-from-contract-to-permanent\/","title":{"rendered":"Switching from Contract to Permanent"},"content":{"rendered":"\n<p class=\"has-theme-default-color has-text-color wp-block-paragraph\" style=\"font-size:22px\">If you are considering moving to a PAYE job, there are a couple of things you should keep in mind when starting part way through a tax year.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For the 2020\/21 tax year, the higher earnings threshold is \u00a350,000. This applies to any UK income from ALL sources. Income examples include:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Limited company salary&nbsp;<\/li><li>Dividends<\/li><li>PAYE position salary<\/li><li>Interest in personal bank accounts<\/li><li>Rental Income<\/li><\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">If the earnings you make from your PAYE position push you over the higher rate earnings threshold for the year (when taking into account your limited company earnings and income from other sources), you will face an unexpected personal tax liability on your limited company dividends. If you plan carefully, you can reduce this. We have illustrated below the potential impact of taking a permanent position part way through a tax year.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"scenario-one--no-additional-personal-tax\">Scenario One \u2013 No Additional Personal Tax<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Sarah started contracting using her own ltd company in 2013, and has decided to take a permanent job \u2013 her last day of contracting is 31 &nbsp;May 2020. In this financial year the company paid her \u00a31,438 in salary and \u00a35,000 of dividends, giving Sarah a gross income of \u00a36,438 from her limited company. Sarah takes a month\u2019s holiday in between finishing with her limited company and starting her permanent &nbsp;position. On 1 July 2020, Sarah starts a permanent role where she will &nbsp;be paid a gross salary of \u00a340,000 between 1 July 2020 and 05 April 2021. Assuming no other sources of income, Sarah\u2019s combined gross income for the tax year will be \u00a346,438. As a result, her earnings are below the higher earnings threshold of \u00a350,000 and assuming her permanent employer taxes her salary at the correct rate, she will not have to pay any further personal tax to pay.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"scenario-two--additional-personal-tax-to-pay\">Scenario Two \u2013 Additional Personal Tax to Pay<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">James started contracting using his own ltd company in 2012, and decided to take a permanent job starting on 01 September 2020. In this financial year the company paid him \u00a33,595 in salary and \u00a318,630 of dividends, giving James a gross income of \u00a322,225 from his limited company. On 1 September 2020, James starts a permanent role where he will be paid a gross salary of \u00a348,000 between 1 September 2020 and 05 April 2021 (the last day for the 2020\/21 tax year). Assuming no other sources of income, James\u2019 combined PAYE\/Salary income (Gross) for the tax year will be \u00a370,225. As a result, his dividends are over the higher earnings threshold and James will have to pay about \u00a35,404.75 in personal tax on the dividends he received from his company. The dividends are taxed at 32.5% rather than 7.5% at the basic rate limit.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It is very important that you remember that the tax that you pay on dividends received over the \u00a32,000 allowance is affected by the total GROSS salary that you receive in the tax year. If you are moving into a permanent position, it is very likely that you will be pushed into the higher rate band and have to pay 32.5% instead of 7.5% dividend tax.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To avoid paying this extra personal tax, the options are:<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li>Get in touch with your Account Manager if you even start to consider a permanent role<\/li><li>As soon as you know you are going to take a permanent role you should reduce the payments you make to yourself to the minimum amount you need to live off. This will help reduce any personal tax liability. Any money you don\u2019t pay out to yourself will remain in the company as retained earnings which you can extract as a capital gain, rather than dividends (your account manager can discuss the tax effects of this with you in more detail).<\/li><li>Take a directors loan to provide you with funds to live off in the interim, then settle the loan by declaring a final dividend payment after trading has ceased \u2013 this will be taxed as a capital gain, rather than dividend payment (your account manager can discuss this option with you in more &nbsp;detail \u2013 for example, limits and restrictions).<\/li><\/ol>\n","protected":false},"excerpt":{"rendered":"<p>If you are considering moving to a PAYE job, there are a couple of things you should keep in mind when starting part way through a tax year. For the 2020\/21 tax year, the higher earnings threshold is \u00a350,000. This applies to any UK income from ALL sources. Income examples&#8230;<\/p>\n","protected":false},"author":2,"comment_status":"open","ping_status":"closed","template":"","format":"standard","meta":{"footnotes":""},"ht-kb-category":[18],"ht-kb-tag":[],"class_list":["post-173","ht_kb","type-ht_kb","status-publish","format-standard","hentry","ht_kb_category-core-info"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.8 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Switching from Contract to Permanent | No Worries Help Centre<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Switching from Contract to Permanent | No Worries Help Centre\" \/>\n<meta property=\"og:description\" content=\"If you are considering moving to a PAYE job, there are a couple of things you should keep in mind when starting part way through a tax year. For the 2020\/21 tax year, the higher earnings threshold is \u00a350,000. This applies to any UK income from ALL sources. 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For the 2020\/21 tax year, the higher earnings threshold is \u00a350,000. This applies to any UK income from ALL sources. 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