Dividends

Nazitf

Can someone check my calculations based on Elaine_Wilson's example above.

The rates are as follows:
Employer NIC 12.8% above £110/week
Personal Allowance of £6,475
20% tax up to £37,400
40% over £37,400
NIC (lower limit) £95/week
NIC (upper limit) £844/week
Corporation tax of 21%

Company Gross profit is £50,000.00 (annual) or £961.54 (weekly)

All salary approach:
Employer NIC (12.8%) = £5,667.84 [this is calculated on amounts over £110/week]

Balance: £50,000.00 - £5,667.84 = £44,332.16

Minus personal allowance: £44,332.16 - £6,475 = £37,857.16

Tax (20%) on £37,400.00 is £7,480.00
Tax (40%) on £457.16 is £182.86
Total tax is £7,480.00 + £182.86 = £7,662.86

New balance: £44,332.16 - £7,662.86 = £36,669.30

Employees NIC (11%) on £749.00/week = £4,284.28 (annually)
Employees NIC (1%) on £117.54/week = £61.12 (annually)

Total employees NIC: £4,284.28 + £61.12 = £4,345.40

New balance: £36,669.30 - £4,345.40 = £32,323.90


Small salary and dividend approach:
Salary: £6,475 (annually) or £124.52 (weekly)

Employer NIC (12.8%) on £14.52 (weekly) = £1.86 (weekly) or £96.64 (annually)

Balance: £50,000.00 - £96.64 = £49,903.36

Taxable profits: £49,903.36 - £6,475 = £43,428.36

Corporation tax (21%) on £43,428.36 = £9,119.96

New balance: £43,428.36 - £9,119.96 = £34,308.40

Net dividends: £34,308.40
Gross dividends: £38,120.45

Dividend Tax (0%) on £37,400.00 = £0.00
Dividend Tax (22.5%) on £720.45 = £162.10

Net amount received: £34,308.40 - £162.10 + £6,475 = £40,621.30

slipp_digby

I may be wrong but your dividend tax figures look too low, you are taxed on the gross dividend payment with the tax credit attached rather than the net and i think you need to add your salary to it as well to determine your total earnings before calculating your tax on the dividends.

your income for calculating tax on the dividend will therefore be 6475(salary)+38120(gros dividend) = 44595

dividend income above 37400 = 7195 which is taxed at effective rate of 25% = 1789 income tax on dividend

net income in your pocket would be 34308+6475 - 1789 = 38994

unless you needed the money, you could reduce the dividend payments so gross div+salary is >37,400 and then retain the profit to release next year.

Nazitf

slipp_digby wrote: »

you are taxed on the gross dividend payment with the tax credit attached rather than the net

My take on this was that you can either tax 25% on the net dividends or 22.5% on the gross dividends. The maths works out the same assuming that [gross dividend] * 0.9 = [net dividend].

slipp_digby wrote: »

and i think you need to add your salary to it as well to determine your total earnings before calculating your tax on the dividends.

This makes sense!

slipp_digby wrote: »

dividend income above 37400 = 7195 which is taxed at effective rate of 25% = 1789 income tax on dividend

Shouldn't this be at 22.5% since you're using the gross dividend value?

slipp_digby wrote: »

unless you needed the money, you could reduce the dividend payments so gross div+salary is >37,400 and then retain the profit to release next year.

I presume you mean div+salary is <37,400

Nazitf

Recalculated based on advise from slipp_digby (thanks!)

Company Gross profit is £50,000.00 (annual) or £961.54 (weekly)

Small salary and dividend approach:
Salary: £6,475 (annually) or £124.52 (weekly)

Employer NIC (12.8%) on £14.52 (weekly) = £1.86 (weekly) or £96.64 (annually)

Balance: £50,000.00 - £96.64 = £49,903.36

Taxable profits: £49,903.36 - £6,475 = £43,428.36
Corporation tax (21%) on £43,428.36 = £9,119.96

New balance: £43,428.36 - £9,119.96 = £34,308.40

Net dividends: £34,308.40
Gross dividends: £38,120.45
Taxable income: £38,120.45 + £6,475 = £44,595.45

Dividend Tax (0%) on £37,400.00 = £0.00

Dividend Tax (22.5%) on £7,195.45 = £1,618.98
[£44,595.45 - £37,400.00 = £7,195.45]

Net amount received: £34,308.40 - £1,618.98 + £6,475 = £39,164.43

slipp_digby

yes you are correct my calc shows tax at 25% on gross dividend, it should be 22.5% of gross, or 25% of net (thats all i bother about as its waht i get!).

the 25% comes from being taxed on 9/10 of the dividend at 22.5% (32.5% rate of tax -10% tax credit)

yes gross div + salary shoudl have read <37,400 to avoid income tax on dividends - typo

Nazitf

What is the definition of a salary? Does it have to be relatively constant?

Could the company pay its entire profits as a salary in one payment each year? This would attract a similar amount of tax however it would result in a lower NI payments since quantities greater than the upper limit only have an NI rate of 1%.

Pennywise

Nazitf wrote: »

What is the definition of a salary? Does it have to be relatively constant?

Could the company pay its entire profits as a salary in one payment each year? This would attract a similar amount of tax however it would result in a lower NI payments since quantities greater than the upper limit only have an NI rate of 1%.

NIC for directors are averaged out over the year - the normal weekly/monthly upper limits don't apply, so there'll be full NIC upto the £40k or so p.a. Also remember that the upper limits don't apply to employers NIC contributions so that's another 12% on all salary, however it is timed.

Nazitf

Since my company only makes up a small proportion of my income I plan to do the following:

Annual Salary (if I had registered my company at the beginning of the tax year): £5720 [calculated using the NIC's Primary threshold which is identical to the Secondary threshold i.e. £110 x 52]

However, because I registered my company later in the tax year, this amount will be pro-rated accordingly as on page 42 of http://www.hmrc.gov.uk/nitables/ca44.pdf.

This will avoid both employer and employee NIC's and depending on your other income may or may not attract income tax. Any residual profits can be paid the following tax year.

This method will still accrue a state pension since the salary is above the lower earnings limit (£4940/year). I presume that if this was done for 52 weeks there would be sufficient class 1 contributions for one state pension year, but I don't understand how I can calculate the shortfall if my annual salary is pro-rated? In other words, what is the minimum amount of class 1 NIC that needs to be paid to contribute to a year's state pension?