Over 60% marginal tax rate on salary when earning £40k across salary and dividend??

firsttimebuyer12_2

Hi,

I run a small business with my friend and we are both Company Directors. Our gross salary is £20k per year each and we expect a net profit of £40k , which we will take as a dividend at the end of the year of £20k each.

As I am now working more 50% hours than my colleague, we have thought about increasing my salary from £20k to £30k to compensate. As we have equal shares in the company, using a dividend instead of salary would mean creating a new class of shares I believe, which we would like to avoid. However, the tax impact of increasing my salary seems so bad, I find it hard to believe, hence I'm putting this quesion out there.

If I increase my salary by £10k, putting this into an income tax calculator online, this tells me I will increase employer NI contributions by £1380, so the total cost to the company of the salary is £11,380.
I will then pay an extra £1200 of employee NI and £2000 income tax on this extra £10k of income. So far, as expected. Further though, I believe the increase in my salary will lead to £10k more of my dividend being taxed at the 32.5% level, which after the tax credit is 25%, leading to an extra £2500 tax on my dividend.

So by increasing my salary £10k, at a cost of £11,380 to the company, I will pay extra taxes of:
Employer NI: £1380
Employee NI: £1200
Income Tax:£2000
Tax on Dividend: £2500

So of the £11380 spent, I will receive in my bank account £4300, meaning a marginal tax rate of just over 62%!! Is this correct!?

If I've got this right, does anyone have advice on alternatives beyond creating a new share class to take a dividend? If I can use the £11380 more efficiently to, fore example, invest in a new venture, repay my student loan or give to charity, they all sound more appealling options!

Many thanks in advance.

noh

Take the extra £10K as company contribution to to your personal pension scheme.

zygurat789

There appears to be £80K to divide.
Reduce the other salary by £10K and increase the dividend to £50K.
Put these into your calculator and see if they are OK

pjclar02

My recommendation would be to consider introducing alphabet shares and reduce your salaries down to £7,488, and pay the rest of dividends. At the levels you are talking about I would imagine you will save around £6,000 per year at least in National Insurance.

nomunnofun

You also need to be careful as the extra £10k may take you over £50k total income and. particularly, if you have benefits in kind, will potentially eliminate any child benefit that you may receive. If you have children, 62% marginal rate may be an underestimate!

Pennywise

Your calculations don't reflect the corporation tax relief on the cost of the payroll, i.e. the £11,380. The CT at 20% will be reduced by £2,276. So, after all taxes, it's not just the £4,300 you get, but there's £2,276 more in the company, so, the net "kept" amount is £6,576. Of course, the new problem is that the company is better off by £2,276, meaning your partner's share is £1,138 better off due to your personal income tax, so you'd need to give yourself more than £10,000 to make it right!

Far easier just to set up new classes of shares so that you can take a higher dividend than them.

grey_gym_sock

Tax on Dividend: £2500

not quite: this figure should be £2250

it's £10,000 gross income, i.e. £9,000 dividend paid + £1,000 tax credit (at 10%). so £2,250 more has to be paid to make up 32.5% tax.

aaronmatt

Calculate this after reducing the other salary by £10K and increase the dividend to £50K. now see the result is this fit to you? I recommend to follow these if suits. And payroll tax that you have to pay in any cost. So calculate the payroll tax might be that can help you in your budget.

Buffett

Issuing more shares to alter the dividend split should not be necessary - your partner can sign something forgoing their 50% entitlement.