Statement of Assumptions
They commence identical contracts on April 1 2010.
Both contracts are at a rate of £70,000 per annum.
Each of them form their own company to contract through.
They both own all of the shares of their companies.
The only expenses that they can claim tax relief on are accountancy fees of £1,000 net of VAT.
No costs of IR35 insurance or professional costs are taken into account.


Mr Happy
The contract is outwith the IR35 rules and he does not apply them.
He operates the VAT flat rate scheme.
He puts £7,000 into a pension.
He has a salary of £10,000 and removes the rest of the profits by dividend.


Mr Grumpy
The contract is outwith the IR35 rules but he does apply IR 35 as he is unsure what to do.
He does not operate the VAT flat rate scheme.
He puts £nil into the pension.
He extracts the maximum salary from the company as per IR35.
He takes the remaining profits as a dividend.

Mr Happy and Mr Grumpy
Year Ending 31st March 2011

		Mr Happy		Mr Grumpy
Income
Net Salary		8,824		41,094
Net Dividends		39,575		1,481
Pension		7,000		0
Total Income After All Costs		55,399		42,575
Reconciliation
Turnover		70,000		70,000
Add:
Flat Rate Scheme Saving		2,380		0
Less: Third Party Costs
Accountants Fees	1,000		1,000
Corporation Tax	11,325		525
Income Tax on Salary	705		13,512
National Insurance	922		11,894
Higher Rate Tax on Dividends	3,029		494
		(16,981)		(27,425)
		55,399		42,575

The tax saving for Mr Happy is £12,824