Dividend Tax

solidpro

Hi

I'm trying to get my head around something.

If my limited company makes £33500 profit this year and I take a dividend of £33500, I'll pay 19% CT on the 33500 and 7.5% dividend tax on £31500.

CT = £6365.50
DT = £2362.50
Total = £8727.50

However if I pay myself salary of £33500, the company will pay zero CT on that and I'll only pay tax after £11500 personal allowance, which with NI would work out at about 32% so £10720.

With this gap seeminly narrowing each year that goes by, do some people see the whole traditional way small LTD company owners pay themselves changing? will it simply just equalise (like it almost has now) and nobody care anymore?

It seems the dividend tax a few years back basically removed that tax saving loophole for all small company owners. I'm not surprised most people who could simply took their business abroad.

cheers

realaledrinker

No pay yourself salary just below the NI lower limit (9k ish). Leaves 24k to pay CT on. Leaves £17k or so for divis. First 2K of divis are tax free then 7.5% on the rest up to your basic rate amount

solidpro

No pay yourself salary just below the NI lower limit (9k ish). Leaves 24k to pay CT on. Leaves £17k or so for divis. First 2K of divis are tax free then 7.5% on the rest up to your basic rate amount

Great idea if you don't care about a state pension.
Also most running their own small LTD company consider the CT implications of dividends, not just the dividend tax.

TheCyclingProgrammer

Your numbers are completely wrong.

Dividends have never really been an income tax saving mechanism - it!!!8217;s more accurate to say they are a national insurance saving mechanism. The difference between paying corporation tax and dividend tax and income tax on a salary has never been that great but you could potentially save thousands in national insurance.

Paying dividends also gives you the option to control your earnings and keep yourself below the higher rate threshold if that!!!8217;s enough income to live on, leaving the excess profits in the company for a rainy day.

Anyway, the correct numbers should be;

£33,500 of taxable profits = £6365 of corporation tax due, leaving you with profits after tax of £27,135. This is the maximum dividend you could take. Dividends come out of post tax profits.

Of that £27k, the first £11,500 would be tax free due to the personal allowance and the next £2k would also be tax free due to the zero rate dividend band.

This l leaves £13,635 of taxable dividends which at the basic rate comes to £1022 and change.

Total tax paid to HMRC = £7387. Net income £25,862.

If you paid the whole profits out as a salary you would pay no corporation tax but you!!!8217;d pay £4500 in income tax and £3052 in employee national insurance BUT you!!!8217;d also have employers national insurance to pay on top of this so you may have to adjust the salary to account for this too.

So the first scenario still works out better, but it!!!8217;s not the most efficient strategy. You!!!8217;d be better off paying a salary to above the lower earnings limit (about £700 a month) giving you a qualifying year for state pension purposes and also reducing your corporation tax by about £1600.

anselld

solidpro wrote: »

Great idea if you don't care about a state pension.

No, it really is a great idea. You don't need to pay NI to get pension credit. You can take PAYE of £8424 without paying NI and still get a full year credit.

solidpro wrote: »

Also most running their own small LTD company consider the CT implications of dividends, not just the dividend tax.

There are no CT implications of dividends, they are taken from post CT profits. (which is why you cant pay the full 33,500 div)

Do you have an accountant?

00ec25

solidpro wrote: »

Great idea if you don't care about a state pension.

your understanding is flawed

the statement was pay just below the NI threshold of "about" 9k

there are 2 thresholds, one above which you pay NI (which is exactly £8,424) and is called the Primary threshold, one above which you pay no NI but still get a state pension credit, that lower threshold is called the lower earnings limit and is exactly £6,032

pay above LEL but below PT and you get pension credit for no cost to you

https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2018-to-2019#class-1-national-insurance-rates

solidpro

£33,500 of taxable profits = £6365 of corporation tax due, leaving you with profits after tax of £27,135. This is the maximum dividend you could take. Dividends come out of post tax profits.

Of that £27k, the first £11,500 would be tax free due to the personal allowance and the next £2k would also be tax free due to the zero rate dividend band.

I gave the example of salary and dividends, so your numbers are completely out because you were only working it out based on 33500 dividends. You can't use the personal allowance twice.

Under your personal allowance (PA)

• For most, £11,850 No income tax payable
• Between PA and PA+£34,500 (basic rate)
• For most, £11,850 to £46,350 20%

There are no CT implications of dividends, they are taken from post CT profits. (which is why you cant pay the full 33,500 div)

You're talking literally and I am looking at the big picture because most small company owners consider the CT as part of their own tax implications. For instance, if I don't take £34500 dividends and re-invest it in a new machine which makes money from water then I'll pay no CT. If I take out £34500 dividends to fan my balls in the sun then "my" company will pay CT.

You can't say that small ltd business shouldn't consider that issuing a £34.5k dividend will have CT implications, not least for ensuring the business has that 19% left over at the end of the FY.

solidpro

your understanding is flawed

the statement was pay just below the NI threshold of "about" 9k

there are 2 thresholds, one above which you pay NI (which is exactly £8,424) and is called the Primary threshold, one above which you pay no NI but still get a state pension credit, that lower threshold is called the lower earnings limit and is exactly £6,032

pay above LEL but below PT and you get pension credit for no cost to you

Your understanding is flawed. Is it better to:

Take £11800 salary and pay £420 in NI, or

Take £8424 in salary and an extra £3376 in dividends, but pay £253.20 in dividend tax and £641.44 in corporation tax *before* issuing the dividend?

I'd rather take home £11380 than £10905.36

UKSBD

solidpro wrote: »

Your understanding is flawed. Is it better to:

Take £11800 salary and pay £420 in NI, or

Take £8424 in salary and an extra £3376 in dividends, but pay £253.20 in dividend tax and £641.44 in corporation tax *before* issuing the dividend?

I'd rather take home £11380 than £10905.36

Your missing out the employers NI.
The reason people pay themselves about £8k is to void paying the NI.
Employers & Employees combined NI is more that the CT

TheCyclingProgrammer

Solidpro - you!!!8217;re not making any sense. Read my post again. I!!!8217;m not using the personal allowance twice.

I presented two examples both of which are correct.

If you have taxable profits of £33,500 and no other retained profits you simply cannot legally pay a dividend of £33,500. You can only pay dividends out of post tax profits for the current year and any retained profits from previous years.

You are aware that your personal allowance still applies to dividend income right?

I highly advise you engage an accountant before you make a costly mistake. For starters you seem to fail to understand that you do not pay corporation tax on dividends paid. You pay dividends AFTER YourCo pays corporation tax.

Edit: one small error in my calculations was that I was using last year!!!8217;s personal allowance which has gone up by £350 this year but it makes no material difference. It saves an extra £26 in tax.

TheCyclingProgrammer

solidpro wrote: »

Your understanding is flawed. Is it better to:

Take £11800 salary and pay £420 in NI, or

Take £8424 in salary and an extra £3376 in dividends, but pay £253.20 in dividend tax and £641.44 in corporation tax *before* issuing the dividend?

I'd rather take home £11380 than £10905.36

You are continuing to pull figures from your backside.

There would be no dividend tax due on the extra £3376 as it is covered by the remainder of your personal allowance.

Taking the £3376 as dividends would require £4167 in taxable profits before corporation tax (£3376 being left after paying £791 in corporation tax at the rate of 19%).

Taking the full personal allowance would indeed save you £791 in corporation tax but will cost you £411 in employee’s NI (deducted from your salary) and a further £472 or so in employer’s national insurance on top of this. The employer’s NI will save you a further £89 in corporation tax making the total cost of this option being £801.

If you are eligible for the employer’s NI annual allowance then taking the whole personal allowance as salary is the better option.