Self employed tax on drawings help

heathcote123

Mistral001 wrote: »

Thanks chalkie99

I think the smoke and mirrors are beginning to disappear for me now!

The tax credit you are given of 10% has to be taken off and this cancels out the 10%, This 10% is actually deducted from the other rates it would seem meaning that the tax you pay on the dividends is as follows:

0 to 35k (10%-10%) = 0%
35k to 150k (32.5-10%) = 22.5%
150k plus (42.5- 10%) = 32.5%

Yup thats about it. Typically you pay yourself (PAYE) about 8k with minimal nics and tax, and the next 30k or so in divs. Personally I stick everything above that in company investment accounts or other investments and you can leave it there till you have a crap year and draw it down then to make the most of your allowances.

I *think* I'm right in thinking that if you build up a big surplus, you can sell this with the company as an asset and pay the minimal entrepreuners tax relief allowance on it. - So if you build up a mil or so you can pay about 10% to get it out... though I've been meaning to check this with the acct.

Bit worryin though that anyone putting in the kind of investment that a shop costs hasn't got an acct that can explain this stuff.

BettySpofkins

heathcote123 wrote: »

Bit worryin though that anyone putting in the kind of investment that a shop costs hasn't got an acct that can explain this stuff.

Well, there's the thing, the accountants don't want you to know this stuff, do they - they just want your business.

For example mine initially told me that on my day rate I would "take home" about £350 per week more as a Ltd company vs. PAYE.

He neglected to mention that that's simply because you pay the tax *after* you take it home rather than before.

heathcote123

BettySpofkins wrote: »

Well, there's the thing, the accountants don't want you to know this stuff, do they - they just want your business.

For example mine initially told me that on my day rate I would "take home" about £350 per week more as a Ltd company vs. PAYE.

He neglected to mention that that's simply because you pay the tax *after* you take it home rather than before.

It's an accountants job to tell you this stuff. Either you misunderstood your accountant, or you should sack them.

Mistral001

BettySpofkins wrote: »

Well, there's the thing, the accountants don't want you to know this stuff, do they - they just want your business.

For example mine initially told me that on my day rate I would "take home" about £350 per week more as a Ltd company vs. PAYE.

He neglected to mention that that's simply because you pay the tax *after* you take it home rather than before.

I cannot think why an accountant would talk in terms of take home weekly wage. There is absolutely no such thing in self-employment or a Ltd Company.

Your accountant should be thinking in terms of yearly turnover, expenses and profit. You can divide what he/she gets by 52 to get the equivalent in weekly amounts if you want.

BTW. Self-employment/ ltd company means paying tax in large chunks quite a while AFTER you have received the income. This is something which catches the unsuspecting out. You should make sure you put away a certain amount regularily throughout the year to pay the tax bill. I hope the accountant explained this as well.

PS.
Do you suspect that the accountant was trying to "sell" you the idea of a Ltd company so that he could get some extra fees because of the extra complexity that a Ltd Company tax involves? if so then change your accountant.

BettySpofkins

Mistral001 wrote: »

Do you suspect that the accountant was trying to "sell" you the idea of a Ltd company so that he could get some extra fees?

In all honesty, yes, I'm starting to think that.

FWIW, I'm with Churchill Knight, who claim to be specialists in this area. Anyone have experience (good or bad) with them?

Mistral001

BettySpofkins

You seem to be a freelancer and you are looking at going Ltd from purely a tax point of view. Ltd ccompanies are not intended for these purposes and you need to go into it considering all aspects of them and not just the tax efficiency aspects.

Also often deciding whether you want to be self-employed or employed (PAYE etc) is not a matter of your choice but that of HMRC in many circumstances, for example where you work for a single firm. The following link will give guidance on this:

http://www.hmrc.gov.uk/employment-status/index.htm

Pennywise

BettySpofkins wrote: »

In all honesty, yes, I'm starting to think that.

FWIW, I'm with Churchill Knight, who claim to be specialists in this area. Anyone have experience (good or bad) with them?

I've never come across them, but looking at their website, there's no sign of them being registered or regulated by any of the major accountancy bodies, i.e. chartered, certified etc. Most firms are proud to tell the world that they're "Chartered accountants" etc., so you can only assume that they're not regulated nor qualified. Please be aware that accountancy isn't a protected profession in the UK, unlike say doctors, solicitors, etc., and literally anyone can call themselves an accountant or set up an accountancy practice without experience, qualifications, etc. At least with a qualified & regulated firm, you know that they are supervised, that they must have indemnity insurance to cover their clients against bad advice, and the staff/principles must have regular ongoing training to keep them up to date.

Suarez

BettySpofkins wrote: »

I'm actually just starting up myself, so have a lot of questions, and this reminds me of one of them.

If a Ltd complany makes some money - say £1,000 per month - corporation tax takes 20% of that, I believe. Surely then if the company owner then pays themself the £800 in dividends, that's further taxed at 20% too, leaving not much? So what is the benefit of doing it this way rather than just being self employed and paying standard income tax?

Wouldn't you draw the £800 out leaving £200 profit paying 20% = £40?

Mistral001

Suarez wrote: »

Wouldn't you draw the £800 out leaving £200 profit paying 20% = £40?

You would pay normal personal income tax on the £800 (at 20%).

It is in relation to the dividends where the fancy accountancy footwork is done as the rates can be less than those of personal income tax even when combined with the Corporation tax on profits, but only if the profits are above about £35k per year it would seem. However you may save a little NIC.

Pennywise

Company profit before tax £1000
Corporation tax £200
Post tax profit £800
Dividend paid £800
Recipient of dividend has no personal tax liability unless their total taxable income goes into higher rate tax band - if so, the balance of dividends above the HR threshold attract a further 25% HR tax.

So if br taxpayer, no personal tax, so overall tax (pers & comp) was £200 on £1,000 profit, i.e. 20% (same as basic rate).

If hr taxpayer, total tax is £400 (£200 corp and £200 pers), i.e. 40%, i.e. equals higher rate tax of 40%.

So no tax saving by paying dividends. Tax usually works out the same or very similar whether paid under PAYE or in dividends.

Mistral001 wrote: »

However you may save a little NIC.

It's far more than "a little" NIC. Combined employers and employees NIC on payroll is a whopping 25.8%. Self employed NIC for sole traders is 9%. You're very soon into thousands of pounds of NIC even for a basic rate taxpayer. On an "average" profit of say £30k, NIC would be £2,180 for a sole trader as opposed to over £5,000 combined ers and ees NIC if all profits taken as salary under PAYE in a limited company. Is it any wonder that a limited company owner would prefer to draw dividends in order to save thousands of pounds in ers and ees NIC.

NIC is the elephant in the room and it's time it was scrapped and income tax/corporation tax increased accordingly - scrapping it would take away all these problems and put everyone on a more level playing field.