A Brief History of Composite Companies

A composite company was a payment structure which appeared around the year 2000. It involved a contractor being placed within a limited company as a shareholder, usually with up to 25 other contractors.

How did a composite company work?

Each contractor would be paid for the hours they worked at minimum wage with the remainder of their pay paid to them as a dividend on the share they held in the composite company. The minimum wage portion of their pay was taxed as PAYE, maintaining the minimum national insurance contributions. In addition to this the contractors could claim business expenses which would increase their take home pay.

What was the benefit to contractors?

On a purely financial level the gain was quite large by current standards. The dividend part of the payment was subject to corporation tax (around 19% back in the year 2000), and that could be reduced significantly by claiming expenses.

Back in 2000/01 if you were working a 40 hour week claiming £75 of expenses and being paid £10 per hour you could expect to take home £320.75 on a 438L tax code, almost £20 more than PAYE at the time. On £12.50 an hour the take home would have increased to £400.75, £31 more than PAYE leaving the contractor paying less than 25% tax over all.

Why composite companies stopped

Composite companies were quite unsophisticated and when they were introduced HMRC weren't ready for them. There were no laws in place to put a stop to them. The end of their life was dictated by a growing concern over HMRC interest and possible IR35 issues but their fate was finally sealed when in 2003 the government introduced a tax free allowance of £10k for small businesses, and single person limited companies were born.